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Off the Top of My Head

World War II Required Sacrifices to Combat the Nazis. Why Are So Few Willing to Sacrifice to Combat the Pending Climate Disaster?

by John Lawrence, January 26, 2021

It will take the equivalent of the World War II effort to combat climate change, but millions of Americans won't even wear a mask to protect their fellow citizens. So is the effort to combat climate change DOA? Some people think we must approach the Green New Deal as the real MEOW—the Moral Equivalent of War. Money should be no problem as J. D. Alt asserts in Paying Ourselves to Save the Planet. This should appeal to all those who will be making good money from a full employment economy. The problem is, as it was in the WW II effort, that resources must be diverted from the consumer economy. During WW II, Americans were asked to make sacrifices in many ways. Rationing was  one of those ways. Supplies such as gasoline, butter, sugar and canned milk were rationed because they needed to be diverted to the war effort. If workers in good paying jobs are using their paychecks to consume more, the price of consumer goods will be bid up, and there will be massive inflation so the Freedom to Consume may have to be limited. After all, there is no Freedom to Consume in the Constitution.

Because war time workers were restricted in their consumption patterns, they were forced to save. That would probably be a good idea for our debt ridden society, but will it work if massive numbers of people think that that would interfere with their freedom to consume? After WW II was over, the pent up demand which was caused by forced saving was unleashed to yield the greatest consumer society in history. All kinds of consumer appliances including television were now available to patriotic citizens who helped win WW II. Yeva Nersisyan and L. Randall Wray say in their paper, "How to Pay for the Green New Deal":

"War spending plus the New Deal reforms led to an unprecedented increase in the size of the government and its deficit (government spending reached a peak of half of GDP, and the deficit reached 26 percent of GDP in 1943 ). Can we compare that to the alternative which might have been global domination by fascism, including elimination of the United States and western democracy? It was only WWII that freed the government’s budget on the necessary scale. This was justified on the basis that there was no alternative—either global subjugation to Nazis or “whatever it takes” (to borrow a phrase) spending. We chose survival. We learned that “taxes for revenue are obsolete,” as Beardsley Ruml put it. And we came out of WW II stronger and richer than ever before. Some of this was thanks to the New Deal institutions as well as the infrastructure created in the run-up to the war; some of it was due to industrial might created by the war machine; and some of it was due to the good wages and benefits on which economic growth could be sustained after the war. It is preposterous to think that we should have just surrendered in order to forego the financial cost of the war."

So is the survival of the planet as a habitable place for human beings to live as important as living on a habitable planet under the Nazis? I should think so, but since climate change is not a clear and present and obvious danger, many people can not even be convinced that the effort to combat global warming is even necessary or, if it is necessary, they could care less because they personally will have vacated the planet by the time existence here gets really hellish. The authors cited above say: "The task ahead of us is bigger. The stakes are higher. The future of humanity lies in the balance. Half measures will not do. It might take all our available resources—and then some—to win
this battle. The experts say we have most of the technology we need. We have unused resources to put to use. We can shift others from destructive uses to be engaged in constructive endeavors. We can mobilize the population for greater effort with the promise of greater equality and a shared and sustainable prosperity. We can make a good effort. We might win."

Modern Monetary Theory has made it clear that the money is available and that taxes need not be raised as long as inflation is controlled. The successful efforts of the New Deal and WW II point the way. Deficit spending is not a problem as it wasn't then. The aftermath of   WW II saw the greatest increase in consumer spending and prosperity in American history. The same can be true after a Green New Deal is implemented and infrastructure around the world has been rebuilt in such a way that we have no further greenhouse gas emissions. That is a metric that can be known, measured and realized. It will take a world wide effort and cooperation, not competition or rivalry, to win the battle against global warming. As the pandemic has demonstrated, we are all in this together.

Off the Top of My Head

Interest on the Debt or the Whole National Debt Could Be Wiped Out by the Fed Tomorrow

by John Lawrence

One of the largest components of the Federal budget is interest on the debt. But the fact is that interest rates on Treasuries don't have to go up when the Fed raises interest rates. The Fed raises interest rates by adjusting the Federal Funds Rate. The Federal Funds Rate is one of the Federal Reserve’s key tools for guiding U.S. monetary policy. Here’s how it works: Customers deposit money at banks, and those deposits provide banks with the capital needed for extending loans and other forms of credit to their customers. Regulators require that banks and other depository institutions keep a certain percentage of their total capital in reserve, to help guarantee their stability and solvency. Banks often need to borrow money from other financial institutions overnight to meet regulators’ reserve requirements—or they may end up with excess reserve capital to lend out to their peers. The federal funds rate provides a reference for institutions as they are borrowing or lending reserves. A bond issuer such as the Treasury Department decides on the coupon rate for its bonds based on prevalent market interest rates, among other things, at the time of the issuance. So the Treasury Department has complete control over the coupon at the time of the issuance of the bond. It doesn't need to consult the market or the Fed or the secondary market for Treasuries which is the market in which Treasuries are traded after they are auctioned off originally. Furthermore, it does not have to rely on the primary market either to sell a sufficient amount of Treasuries so the government can pay its bills. That's because the Fed can buy any unsold Treasuries and just place them on its balance sheet. The Fed buys and sells Treasuries all the time.

All monetary policy decisions of the Federal Reserve--including buying and selling securities--are made independently of the borrowing decisions of the federal government and are intended solely to fulfill the mandate set out for the Federal Reserve by law--maximum employment, stable prices, and moderate long-term interest rates.

The Federal Reserve purchases Treasury securities held by the public through a competitive bidding process. The Federal Reserve does not purchase new Treasury securities directly from the U.S. Treasury, and Federal Reserve purchases of Treasury securities from the public are not a means of financing the federal deficit.

In financing the federal deficit, the federal government borrows from the public by issuing Treasury securities, which are sold at auction according to a schedule that is published quarterly. The Treasury determines the types and amounts of Treasury securities sold at auction with the goal of achieving the lowest financing costs for the federal government over time. The Federal Reserve does not participate in competitive bidding at Treasury auctions, and the Treasury's debt management decisions are not influenced by the Federal Reserve's purchases of Treasury securities in secondary markets.

When the Fed was goosing the economy with quantitative easing, QE, it bought mortgage backed securities and also Treasuries. Quantitative easing refers to the fact that the Fed bought up ill performing or bankrupt assets held by private banking institutions like Collateralized Debt Obligations, CDOs, which ere worthless mortgages packaged together, for cash which was then injected into the bank. Presto chango, now the bank was healthy again instead of being burdened by these worthless CDOs. When QE was in place, the Fed purchased other securities on the open market, including U.S. Treasuries. “Under this program, the Fed became one of the biggest buyers of Treasury securities in the market,” says Tom Hainlin, national investment strategist at U.S. Bank. So the point is that although "the Treasury's debt management decisions are not influenced by the Federal Reserve's purchases of Treasury securities in secondary markets," the Fed could purchase Treasuries if they went unsold when they were first introduced into the primary market, and it can always buy Treasuries on the open or secondary market. This flexibility means that the Treasury doesn't have to set coupon rates on its Treasuries based on market interest rates, and that means that interest on the national debt could be controlled. The Fed could buy up Treasuries with high coupon rates and replace them with low coupon rate Treasuries or not replace them at all. Interest on the national debt could be reduced to an insignificant amount based on the Fed's operations. The fact that the Fed's balance sheet is growing by all these QE activities means absolutely nothing. In fact the Fed's balance sheet could swallow up the entire national debt. It would be just a figure on an accounting sheet of no consequence.

To answer the question posed by this article, "Why do Interest Rates on Treasuries Have to Go Up When the Fed Raises Interest Rates", they don't. People will want to hold Treasuries regardless of their value because their money is absolutely secure. That's the key point.

Off the Top of My Head

Government Deficit Spending Is Not the Problem: Lack of Labor and Physical Resources Is

by John Lawrence

Since the US dollar is a sovereign fiat currency, the US can never run out of dollars. The debt ceiling is a totally artificial limit which results in the US hoisting itself on its own pitard. According to Modern Monetary Theory (MMT) as espoused in The Deficit Myth by Stephanie Kelton, the only limit on government spending is inflation, and inflation is concerned with the amount and nature of resources available to soak up the money injected into the economic system by the government. According to this theory it makes sense that a lack of labor resources could lead to inflation. Consider that right now there is a shortage of air traffic controllers, and this is leading to a cancellation of flights. If there were more air traffic controllers available, the number of flights could be increased, and more economic activity would ensue. The constraint on flights available because of the lack of air traffic controllers leads to inflation because the money charged for each available flight can be increased. Essentially there is a bidding war for the available flights. If any resource including natural resources like steel and cement is not sufficient for the demand for those resources, then the price of those resources will increase leading to inflation. Right now in the US labor is becoming a scarce resource especially labor of the type necessary in the essential economy, that is the economy of goods and services necessary for the continuation and enhancement of everyday life. As more labor is developed for essentially useless services like the entertainment and social media industries, plumbers, electricians and carpenters are not available for useful services, and, therefore, the cost of those services increases.

Which brings us to Biden's Inflation Reduction Act which allocates $370 billion to rebuild infrastructure and fight climate change. These are all necessary and vital goals, but the question should be asked are the resources for this amount of spending sufficient or will this spending be inflationary. To put it more succinctly is the blue collar labor sufficient for the job? If not, the price of labor will be bid up and the spending will be inflationary. More and more these days students are encouraged to go to college where they end up after graduation working for Wall Street or hedge funds or in the entertainment/social media industry. They are not encouraged to go to vocational technical schools to become carpenters, plumbers and electricians. So they go into industries which are not essential to the real economy. There are shortages of labor for the real economy everywhere we look. In order to overcome these shortages, it would be necessary to step up legal immigration since immigrants by and large fill the jobs Americans don't want to do, and by and large Americans don't want to perform any kind of the less glamorous and remunerative type of labor necessary for production in the real economy. Also outsourcing has made it unnecessary for Americans to perform labor in the real economy. We rely either on immigrants or foreign workers for that.

The next thing is that all this infrastructure rebuilding is going to contribute to global warming as well as reducing it. Rebuilding all the bridges of America will require large amounts of steel and cement. Steel and cement production produce large amounts of carbon dioxide which is emitted into the atmosphere. The International Energy Agency estimates that direct CO² emissions due to crude steel production is approximately 1.4 tons of CO² per ton of steel produced. The cement industry is responsible for about 8% of planet-warming carbon dioxide emissions — far more than global carbon emissions from aviation. If the cement industry were a country, it would be the third-largest emitter of carbon dioxide in the world, after the U.S. and China. So rebuilding America's infrastructure will contribute to global warming while at the same time attempting to reduce global warming. The fact is that alternatives to steel and cement which do not produce greenhouse gasses are not available. Research on these topics needs to be stepped up. But more research in areas like artificial intelligence, of the kind which has no use in the amelioration of global warming, takes place while productive research into materials to replace steel and cement languishes. Also while more electric vehicles are being produced, the electric energy to power these vehicles is coming from power plants that still use fossil fuels to produce it. One form of greenhouse gas production is being traded for another. Nothing is gained unless all energy generating power plants are using renewable and non carbon dioxide producing fuels.

The problem is that limited resources both in terms of labor and physical resources will hamper efforts both in repairing American infrastructure and building infrastructure which reduces the amount of greenhouse gas production. Stephanie Kelton writes: "That's why MMT recommends a different approach to the federal budgeting process, one that integrates inflation risk into the decision making process so that lawmakers are forced to stop and think about whether they have taken the necessary steps to guard against inflation risk before approving any new spending. MMT would make us safer in this respect because it recognizes that the best defense against inflation is a good offense. We don't want to allow excessive spending to cause inflation and then fight inflation after it happens. We want agencies like the CBO helping to evaluate new legislation for potential inflation risk before Congress commits to funding new programs so that the risks can be mitigated preemptively. At its core  MMT is about replacing an artificial (revenue) constraint with a real (inflation) restraint." The artificial revenue constraint is the debt ceiling!

In the above passage the words "inflation risk" could also be replaced with "greenhouse gas emission risk." The CBO should evaluate both kinds of risks. So as the economy becomes more electrified in terms of electric cars and buildings, we need to think about the fact that the electricity generated by these increased demands needs to come from non carbon dioxide emitting sources. Also substitutes must be found quickly - in other words research needs to be stepped up - to find substitutes for steel and cement. To boot, non polluting energy sources must be found for ships and planes. Both human and physical natural resources must be taken into account. Have all these things been thought through?

Off the Top of My Head

The Solution to the Debt Crisis: Tax the Rich

by John Lawrence

Republicans want Biden to cut back spending. Democrats should want to increase taxation on the rich. The debt can be ameliorated either by reducing spending or increasing taxation. The debt is a result both of overspending and undertaxing. For all those who care about the size of the debt, they should be as concerned about undertaxing to the same extent they are concerned about overspending. Since the three wealthiest people in the United States — Bill Gates, Jeff Bezos, and Warren Buffett —now own more wealth than the entire bottom half of the American population combined, a total of 160 million people or 63 million households, the obvious culprit here is not overspending, it's under taxation of the rich. In addition to taxing the incomes of the rich, there needs to be instituted a wealth tax. Whoa, you say, this would discourage entrepreneurs who are responsible for inventing the next big thing which is what contributes the most to the American economy. We don't need another gadget; we need all hands on deck to fight global warming. This is being done by Joe Biden's infrastructure bill which is a government, not a private, solution. Private entrepreneurship is less important in a period of global warming than large scale government solutions. Therefore, discouraging entrepreneurship, except that which supports a solution to global warming, is actually a positive development.

America’s top 25 billionaires — a group the size of a major league baseball team’s active roster —together hold $1 trillion in wealth. These 25 have as much wealth as 56 percent of the population, a total 178 million people or 70 million households. The solution to government debt is to go where the money is and tap that. When asked why he robbed banks, Willie Sutton simply replied, “Because that's where the money is.” By the same token, the solution to the national debt is for the government to go where the money is: billionaires and Forbes 400 corporations. Americans don't need any new gadgets to spend their money on. In the World War II era consumption was both voluntarily and manditorily reduced in order to put more resources into the war effort. The war on global warming is even more important than World War II because, if we lose this war, the survival of the whole human species is at risk. Put simply we need to reduce consumption of the gadgets and entertainment provided by the private sector and increase expenditures on large scale projects which can ameliorate global warming. Of necessity those projects and that spending has to be initiated by government in cooperation with the private sector, but government has to lead the way and provide the money.

Income inequality is a major problem of American society. This problem can be resolved and the resources to prevent global warming provided for by taxing the rich. The problem is to reduce American consumption which is 70% of the US economy and increase government spending as long as that increased spending is spent on the solutions to global warming. At the same time the national debt can be reduced. The national debt in and of itself is not a problem, but interest on the national debt is. There are other solutions to decreasing the interest such as having the Fed create the money by quantitative easing. Instead of the Fed's depositing this money in the accounts of the big banks, it would deposit the money in the Treasury's account. "The whole idea of Modern Monetary Theory is that since a sovereign entity can borrow in its own currency, it can print more money when it needs to pay off all its debt. The central bank just needs to keep interest rates low," says Robert R. Johnson, professor of finance at the Heider College of Business at Creighton University. But there's the rub. As the Fed raises interest rates to control inflation, interest on the national debt also increases. That's why a mechanism needs to be found by which the Fed creates the money to run the government instead of the Treasury borrowing the money.

So in the meantime taxing the rich seems to be the best policy in order to bring the national debt down, to reduce economic inequality and to provide the money for government programs to combat global warming.

Off the Top of My Head

The Sword of Damocles Which is the Debt Ceiling

by John Lawrence

The Federal Reserve can just create the money like they did with quantitative easing. They created the money and gave it to the banks. Now their balance sheet is $8.5 trillion. This is not a debt, but it is similar to the national debt which is $31 trillion. You could say that this $31 trillion is on the US' balance sheet or, similarly, the Federal Reserve has an $8.5 trillion debt. See if the Fed creates money, it's not a debt, but if the US Treasury needs money, it has to borrow it. What if no one wants to buy Treasury bonds? Well then, the Fed would buy them itself and just create the money to buy them and add it to its balance sheet. The debt ceiling is such a useless and bogus aspect of American democracy and has the potential of causing the US to default on its debts with disastrous consequences. The Fed never has to pay down its balance sheet nor does the US ever have to have its taxpayers pay off the national debt. The national debt is just an accounting mechanism as is the number on the Fed's balance sheet. As a sovereign fiat currency, the US can just create money. That's not to say that it should do this hap hazardly or willy nilly. But there was a lot of willy nillyness in the years after the Great Recession in 2008 when the Fed kept on quantitatively easing and creating money and giving it to the banks. However, the Fed is prohibited by law from creating money and giving it to poor people. Of course.

So why is the national debt so high? The simple answer is tax cuts for the rich. Americanprogress.org reported:

Tax cuts initially enacted during Republican trifectas in the past 25 years slashed taxes disproportionately for the wealthy and profitable corporations, severely reducing federal revenues. In fact, relative to earlier projections, spending is down, not up. But revenues are down significantly more. If not for the Bush tax cuts and their extensions—as well as the Trump tax cuts—revenues would be on track to keep pace with spending indefinitely, and the debt ratio (debt as a percentage of the economy) would be declining. Instead, these tax cuts have added $10 trillion to the debt since their enactment and are responsible for 57 percent of the increase in the debt ratio since 2001, and more than 90 percent of the increase in the debt ratio if the one-time costs of bills responding to COVID-19 and the Great Recession are excluded. Eventually, the tax cuts are projected to grow to more than 100 percent of the increase.

So why not tax the hell out of the rich, flood the coffers of the Treasury with cash and pay down the national debt? Or at least tax the rich as Biden has proposed doing? Biden famously changed the narrative from "tax and spend" to "no one making less than $400,000 will get a tax increase." So Republicans always want to reduce taxes on the rich and reduce or eliminate social programs which benefit mostly the poor and middle class. The alternative, which Democrats should loudly state, is to raise taxes on the rich and enact programs which benefit the poor and middle class. Voila, the budget is balanced. Raise taxes a little more on the rich and the national debt is paid down. Actually it doesn't matter what the figure of the national debt is. Foreign holders of US Treasury debt could be paid off tomorrow by virtue of the fact that the Fed could just with a few keystrokes on a computer create the money and take it on their balance sheet. This money would then be added, again with a few keystrokes on a computer, to China's or Japan's account at the Fed thus zeroing out the debt. Instead the US government goes on paying interest on its debt which could turn into a problem as it crowds out other budgetary items. Clearly, this is no way for the US government to conduct its business.

Off the Top of My Head

Nice Economy You Have Here. It Would Be a Shame If Something Happened To It

by John Lawrence

The debt ceiling is not mentioned in the Constitution. It's an act of Congress, the Public Debt Acts of 1939 and 1941. Congress authorizes the amount of spending that can be undertaken by the US government, and also that, if there is not enough money in the Treasury for this spending, the Treasury is authorized to borrow the money by issuing Treasury bonds. However, the amount of borrowing cannot exceed the debt ceiling. If the amount of money the government has already been authorized to spend exceeds the debt ceiling, there is no other alternative except to raise the debt ceiling. Otherwise, the US government will default on its debt. The question arises why is there a debt ceiling at all? If Congress didn't authorize the spending of the money in the first place, then there would be no need to borrow at all or if Congress wanted to limit borrowing, it shouldn't authorize a budget which exceeds that amount. This is just another double bind in the law which makes the US "rule of law" dysfunctional. The 14th amendment of the Constitution says, "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." So there you have it: the government by law must pay its bills and the government by law cannot exceed the debt ceiling. It's what you call a contradiction. You would think that the provisions in the Constitution would take precedence over an act of Congress.

So that gets us to the minting of the trillion dollar coin. Although it's up to Congress to raise the debt ceiling, the Treasury Secretary could order the mint to produce the trillion dollar coin which could then be deposited in the Federal Reserve and voila, the US government could pay its bills. The Federal Reserve transfers all money deposited with it for taxes and the sale of Treasury bonds to the account of the Treasury of the US. The legal basis for the concept of a trillion-dollar coin arises from the fact that the United States Mint is authorized to produce platinum coinage without any restrictions as to the number of coins produced or their face value. Alternatively, President Biden could declare that the 14th amendment authorizes him to pay the bills. This is a major dysfunction of the US government and the US version of democracy. Republicans are eager to use their power to disrupt the fact that money was authorized by the previous Democratic controlled House and now it's up to them to raise the debt limit. So you might ask why hasn't Congress gotten rid of the debt ceiling provision that it enacted in the Public Debt Acts?The reason is that even when both Houses of Congress were controlled by Democrats, as they were in the first two years of the Biden administration, Republicans in the Senate filibustered any attempt by Democrats to do that or much of anything else. The filibuster represents more dysfunction. US democracy is hamstrung because one party refuses to govern in a sensible and cooperative manner. Their interest is only in defeating Democrats not in doing what's best for the American people.

Paul Krugman wrote in the New York Times:

The issue at hand is whether to raise the federal debt ceiling. This ceiling is a peculiar — and destructive — quirk of the U.S. budget process. Here’s how it works: First, Congress passes legislation that determines federal spending and tax collection. This legislation may lead to a budget deficit. Whether that’s a good idea is beside the point: Congress made its choices, and the Treasury Department must do whatever is necessary to honor duly enacted legislation, which may require borrowing to cover the deficit.

But under current law Congress must also vote a second time to authorize federal borrowing by raising the limit on the allowed amount of debt. And we’re only a few months from the point where America won’t be able to keep paying its bills — that is, spend the money Congress has already told it to spend — unless Congress votes to raise that limit.

Yet now House Republicans aren’t willing to raise the limit unless they are given policy concessions they would never be able to enact via the normal legislative process. Basically, they’re saying, “Nice economy you have here. It would be a shame if something happened to it.”

The US Constitution needs a complete overhaul in which stupid conflicts like these over the debt ceiling are ironed out. Besides the Federal Reserve can just create money like it did with Quantitative Easing. The US dollar is a sovereign, fiat currency. It's only dysfunctional laws that prevents it from doing so. During quantitative easing the Federal Reserve bought Treasuries and other securties and gave the cash that was generated to the big banks to keep them afloat. So it could buy Treasuries and give the money to the US Treasury. It would be using the same quantitattive easing it used to keep the banks float in order to keep the government afloat. Problem solved and it wouldn't mean taking on more debt.

Off the Top of My Head

The Only Way to Create Affordable Housing Is For Government to Set the Price of Rent

by John Lawrence

As long as the market sets the price of rent, rents will become increasingly unaffordable especially in highly desirable areas like San Diego. Remember public housing? Some version of this is necessary or homeless will be relegated to shelters and/or time limited stays in subsidized housing for eternity. Why isn't public housing feasible? It's NIMBYism (not in my back yard) and NMTMFTism (not my tax money for this). What most people don't realize is that the Federal government can build public housing with no tax implications because unlike state governments, the Federal government has a sovereign fiat currency, the US dollar. The only non-artificial restraint on Federal expenditures is inflation so right now is probably not a good time to allocate dollars for public housing. Of course we expect that lessons have been learned so that public housing does not degenerate into the kind of situation like the notorious Cabrini-Green development.

Crime and neglect created hostile living conditions for many residents, and "Cabrini–Green" became a metonym for problems associated with public housing in the United States. In 1995, the Chicago Housing Authority (CHA) began tearing down dilapidated mid- and high-rise buildings, with the last demolished in 2011. Today, only the original two-story rowhouses remain. The area has seen major redevelopment due to its proximity to downtown, resulting in a combination of upscale high-rises and townhouses, with some units being CHA-owned, creating a mixed-income neighborhood. Dispersal of affordable units throughout an area is necessary in my opinion to prevent concentration of crime and gangs in certain areas. There is no need for public housing to be concentrated like the Cabrini-Green development. It can be dispersed so that an area is mixed income, and less likely to attract gang activity which seems to happen in pockets of poverty.

Of course the US Federal government, based on the two party system can hardly rationalize spending money on public housing as long as Republicans have any say about it or as long as they can filibuster it to death. Progressives have been lucky to get a modicum of progressive legislation passed during the Biden administration. Biden has had to tone down much of the progressive legislation he attempted to pass at first. Nevertheless he has accomplished much. Public housing is not even on the table as a solution to the homeless and housing affordability problem. Rents just continue to increase way beyond a family's ability to pay them. State and local governments are throwing millions of dollar at the homeless problem without even putting a dent in it. It will take some radical ideas to solve it of which disbursed public housing is one. It totally goes against prevailing notions of a capitalist based, profit oriented society, not the least of which is that an ample supply of public, affordable housing units would undermine landlord profits by keeping the cost of housing in the for profit market under control. It would put a base line under housing costs.

Off the Top of My Head

Joe Biden's Policy: Speak Loudly but Carry a Small Stick

by John Lawrence

As opposed to Theodore Roosevelt's policy: speak softly but carry a big stick. I think Biden's policy is correct. By all means we don't want World War III. As Ellen Brown makes clear on Web of Debt blog, sanctions will not do much except hasten the day when the US dollar is not the only world's reserve currency. There are so many workarounds to sanctions, and billionaires can always replace their super yachts. Russia has a fiat currency just like the US dollar. Modern Monetary Theory has shown that a country with a fiat currency can have its central bank print as much of that currency as it wishes. The only constraining factor is inflation. Right now the US is more constrained by inflation than Russia is. There is no need for Russia's domestic economy to suffer because of inflation. Businesses can continue to receive investment loans from the central bank. International trade will continue with friendly countries like India, China, Venezuela and Turkey. Turkey is a member of NATO by the way, and India is the world's largest democracy.

Daily Sabah reported on March 11, 2022 in Turkish businesses expect progress on using rubles in trade with Russia :

"Since the currency dispute with shipping companies is causing problems in the delivery of goods passing through customs, Turkey should actively work to develop a mechanism to facilitate trade with Russia in rubles, Istanbul Chamber of Commerce (ITO) head Şekib Avdagiç said Friday. Avdagiç stated that the companies working with Russia see the withdrawal of Western countries from Moscow as a new opportunity and emphasized that it is important to enable the use of the national currency of Russia. The issue was also brought up during President Recep Tayyip Erdoğan’s phone call with his Russian counterpart Vladimir Putin, he reiterated. Erdoğan told Putin that, apart from the euro and dollar, trade between the two countries can be carried out using the Russian ruble and Chinese yuan."

Aljazeera reported:

Mumbai, India–Indian authorities are actively considering dedicated payment mechanisms for trade with Russia to enable existing trade obligations in the wake of sanctions imposed on the Kremlin, a move that will also pave the way for cheaper oil imports to meet the country’s energy demands. In the past month, as sanctions have been imposed on Russia, the scope of a payment mechanism in local currencies has expanded from being a means to sustain ongoing trade to possibilities of deeper engagement, including increasing bilateral trade.

Of course, US authorities are managing the news here just as they are in Russia. They don't want you to know that our erstwhile ally, India, the world's largest democracy is doing workarounds to avoid US sanctions. As Ellen's article points out, we in the US may be better off once the US dollar is not the only world's reserve currency. At that point we may have to rely more on our domestic economy and infrastructure just as Russia is being forced to do now. So we won't have to be at the mercy of supply chains from other parts of the world. More stuff will be manufactured here in the good old USA, and that's a good thing.

The Coming Global Financial Revolution: Russia Is Following the American Playbook

Posted on April 5, 2022 by Ellen Brown from Web of Debt blog

No country has successfully challenged the U.S. dollar’s global hegemony—until now. How did this happen and what will it mean?

Foreign critics have long chafed at the “exorbitant privilege” of the U.S. dollar as global reserve currency. The U.S. can issue this currency backed by nothing but the “full faith and credit of the United States.” Foreign governments, needing dollars, not only accept them in trade but buy U.S. securities with them, effectively funding the U.S. government and its foreign wars. But no government has been powerful enough to break that arrangement – until now. How did that happen and what will it mean for the U.S. and global economies?

The Rise and Fall of the PetroDollar

First, some history: The U.S. dollar was adopted as the global reserve currency at the Bretton Woods Conference in 1944, when the dollar was still backed by gold on global markets. The agreement was that gold and the dollar would be accepted interchangeably as global reserves, the dollars to be redeemable in gold on demand at $35 an ounce. Exchange rates of other currencies were fixed against the dollar. 

But that deal was broken after President Lyndon Johnson’s “guns and butter” policy exhausted the U.S. kitty by funding war in Vietnam along with his “Great Society” social programs at home. French President Charles de Gaulle, suspecting the U.S. was running out of money, cashed in a major portion of France’s dollars for gold and threatened to cash in the rest; and other countries followed suit or threatened to. 

In 1971, President Richard Nixon ended the convertibility of the dollar to gold internationally (known as “closing the gold window”), in order to avoid draining U.S. gold reserves. The value of the dollar then plummeted relative to other currencies on global exchanges. To prop it up, Nixon and Secretary of State Henry Kissinger made a deal with Saudi Arabia and the OPEC countries that OPEC would sell oil only in dollars, and that the dollars would be deposited in Wall Street and City of London banks. In return, the U.S. would defend the OPEC countries militarily. Economic researcher William Engdahl also presents evidence of a promise that the price of oil would be quadrupled. An oil crisis triggered by a brief Middle Eastern war did cause the price of oil to quadruple, and the OPEC agreement was finalized in 1974.

The deal held firm until 2000, when Saddam Hussein broke it by selling Iraqi oil in euros. Libyan president Omar Qaddafi followed suit. Both presidents wound up assassinated, and their countries were decimated in war with the United States. Canadian researcher Matthew Ehret observes:

We should not forget that the Sudan-Libya-Egypt alliance under the combined leadership of Mubarak, Qadhafi and Bashir, had moved to establish a new gold-backed financial system outside of the IMF/World Bank to fund large scale development in Africa. Had this program not been undermined by a NATO-led destruction of Libya, the carving up of Sudan and regime change in Egypt, then the world would have seen the emergence of a major regional block of African states shaping their own destinies outside of the rigged game of Anglo-American controlled finance for the first time in history.

The Rise of the PetroRuble

The first challenge by a major power to what became known as the petrodollar has come in 2022. In the month after the Ukraine conflict began, the U.S. and its European allies imposed heavy financial sanctions on Russia in response to the illegal military invasion. The Western measures included freezing nearly half of the Russian central bank’s 640 billion U.S. dollars in financial reserves, expelling several of Russia’s largest banks from the SWIFT global payment system, imposing export controls aimed at limiting Russia’s access to advanced technologies, closing down their airspace and ports to Russian planes and ships, and instituting personal sanctions against senior Russian officials and high-profile tycoons. Worried Russians rushed to withdraw rubles from their banks, and the value of the ruble plunged on global markets just as the U.S. dollar had in the early 1970s. 

The trust placed in the U.S. dollar as global reserve currency, backed by “the full faith and credit of the United States,” had finally been fully broken. Russian President Vladimir Putin said in a speech on March 16 that the U.S. and EU had defaulted on their obligations, and that freezing Russia’s reserves marks the end of the reliability of so-called first class assets. On March 23, Putin announced that Russia’s natural gas would be sold to “unfriendly countries” only in Russian rubles, rather than the euros or dollars currently used. Forty-eight nations are counted by Russia as “unfriendly,” including the United States, Britain, Ukraine, Switzerland, South Korea, Singapore, Norway, Canada and Japan. 

Putin noted that more than half the global population remains “friendly” to Russia. Countries not voting to support the sanctions include two major powers – China and India – along with major oil producer Venezuela, Turkey, and other countries in the “Global South.” “Friendly” countries, said Putin, could now buy from Russia in various currencies.

On March 24, Russian lawmaker Pavel Zavalny said at a news conference that gas could be sold to the West for rubles or gold, and to “friendly” countries for either national currency or bitcoin.

Energy ministers from the G7 nations rejected Putin’s demand, claiming it violated gas contract terms requiring sale in euros or dollars. But on March 28, Kremlin spokesman Dmitry Peskov said Russia was “not engaged in charity” and won’t supply gas to Europe for free (which it would be doing if sales were in euros or dollars it cannot currently use in trade). Sanctions themselves are a breach of the agreement to honor the currencies on global markets. 

Bloomberg reports that on March 30, Vyacheslav Volodin, speaker of the lower Russian house of parliament, suggested in a Telegram post that Russia may expand the list of commodities for which it demands payment from the West in rubles (or gold) to include grain, oil, metals and more. Russia’s economy is much smaller than that of the U.S. and the European Union, but Russia is a major global supplier of key commodities – including not just oil, natural gas and grains, but timber, fertilizers, nickel, titanium, palladium, coal, nitrogen, and rare earth metals used in the production of computer chips, electric vehicles and airplanes. 

On April 2, Russian gas giant Gazprom officially halted all deliveries to Europe via the Yamal-Europe pipeline, a critical artery for European energy supplies.

U.K. professor of economics Richard Werner calls the Russian move a clever one – a replay of what the U.S. did in the 1970s. To get Russian commodities, “unfriendly” countries will have to buy rubles, driving up the value of the ruble on global exchanges just as the need for petrodollars propped up the U.S. dollar after 1973. Indeed, by March 30, the ruble had already risen to where it was a month earlier. 

A Page Out of the “American System” Playbook

Russia is following the U.S. not just in hitching its national currency to sales of a critical commodity but in an earlier protocol – what 19th century American leaders called the “American System” of sovereign money and credit. Its three pillars were (a) federal subsidies for internal improvements and to nurture the nation’s fledgling industries, (b) tariffs to protect those industries, and (c) easy credit issued by a national bank.

Michael Hudson,  a research professor of economics and author of “Super-Imperialism: The Economic Strategy of American Empire” among many other books, notes that the sanctions are forcing Russia to do what it has been reluctant to do itself – cut reliance on imports and develop its own industries and infrastructure. The effect, he says, is equivalent to that of protective tariffs. In an article titled “The American Empire Self-destructs,” Hudson writes of the Russian sanctions (which actually date back to 2014): 

Russia had remained too enthralled by free-market ideology to take steps to protect its own agriculture or industry. The United States provided the help that was needed by imposing domestic self-reliance on Russia (via sanctions). When the Baltic states lost the Russian market for cheese and other farm products, Russia quickly created its own cheese and dairy sector – while becoming the world’s leading grain exporter.

Russia is discovering (or is on the verge of discovering) that it does not need U.S. dollars as backing for the ruble’s exchange rate. Its central bank can create the rubles needed to pay domestic wages and finance capital formation. The U.S. confiscations thus may finally lead Russia to end neoliberal monetary philosophy, as Sergei Glaziev has long been advocating in favor of MMT [Modern Monetary Theory]. …

What foreign countries have not done for themselves – replacing the IMF, World Bank and other arms of U.S. diplomacy – American politicians are forcing them to do. Instead of European, Near Eastern and Global South countries breaking away out of their own calculation of their long-term economic interests, America is driving them away, as it has done with Russia and China. 

Glazyev and the Eurasian Reset

Sergei Glazyev, mentioned by Hudson above, is a former adviser to President Vladimir Putin and the Minister for Integration and Macroeconomics of the Eurasia Economic Commission, the regulatory body of the Eurasian Economic Union (EAEU). He has proposed using tools similar to those of the “American System,” including converting the Central Bank of Russia to a “national bank” issuing Russia’s own currency and credit for internal development. On February 25, Glazyev published an analysis of U.S. sanctions titled “Sanctions and Sovereignty,” in which he stated:

[T]he damage caused by US financial sanctions is inextricably linked to the monetary policy of the Bank of Russia  …. Its essence boils down to a tight binding of the ruble issue to export earnings, and the ruble exchange rate to the dollar. In fact, an artificial shortage of money is being created in the economy, and the strict policy of the Central Bank leads to an increase in the cost of lending, which kills business activity and hinders the development of infrastructure in the country.

Glazyev said that if the central bank replaced the loans withdrawn by its Western partners with its own loans, Russian credit capacity would greatly increase, preventing a decline in economic activity without creating inflation.   

Russia has agreed to sell oil to India in India’s own sovereign currency, the rupee; to China in yuan; and to Turkey in lira. These national currencies can then be spent on the goods and services sold by those countries. Arguably, every country should be able to trade in global markets in its own sovereign currency; that is what a fiat currency is – a medium of exchange backed by the agreement of the people to accept it at value for their goods and services, backed by the “full faith and credit” of the nation. 

But that sort of global barter system would break down just as local barter systems do, if one party to the trade did not want the goods or services of the other party. In that case, some intermediate reserve currency would be necessary to serve as a medium of exchange. 

Glazyev and his counterparts are working on that. In a translated interview posted on The Saker, Glazyev stated:

We are currently working on a draft international agreement on the introduction of a new world settlement currency, pegged to the national currencies of the participating countries and to exchange-traded goods that determine real values. We won’t need American and European banks. A new payment system based on modern digital technologies with a blockchain is developing in the world, where banks are losing their importance. 

Russia and China have both developed alternatives to the SWIFT messaging system from which certain   Russian banks have been blocked. London-based commentator Alexander Mercouris makes the interesting observation that going outside SWIFT means Western banks cannot track Russian and Chinese trades.

Geopolitical analyst Pepe Escobar sums up the plans for a Eurasian/China financial reset in an article titled “Say Hello to Russian Gold and Chinese Petroyuan.” He writes:

It was a long time coming, but finally some key lineaments of the multipolar world’s new foundations are being revealed.

On Friday [March 11], after a videoconference meeting, the Eurasian Economic Union (EAEU) and China agreed to design the mechanism for an independent international monetary and financial system. The EAEU consists of Russia, Kazakhstan, Kyrgyzstan, Belarus and Armenia, is establishing free trade deals with other Eurasian nations, and is progressively interconnecting with the Chinese Belt and Road Initiative (BRI).

For all practical purposes, the idea comes from Sergei Glazyev, Russia’s foremost independent economist ….

Quite diplomatically, Glazyev attributed the fruition of the idea to “the common challenges and risks associated with the global economic slowdown and restrictive measures against the EAEU states and China.” 

Translation: as China is as much a Eurasian power as Russia, they need to coordinate their strategies to bypass the US unipolar system.

The Eurasian system will be based on “a new international currency,” most probably with the yuan as reference, calculated as an index of the national currencies of the participating countries, as well as commodity prices. … 

The Eurasian system is bound to become a serious alternative to the US dollar, as the EAEU may attract not only nations that have joined BRI … but also the leading players in the Shanghai Cooperation Organization (SCO) as well as ASEAN. West Asian actors – Iran, Iraq, Syria, Lebanon – will be inevitably interested.

Exorbitant Privilege or Exorbitant Burden?

If that system succeeds, what will the effect be on the U.S. economy? Investment strategist Lynn Alden writes in a detailed analysis titled “The Fraying of the US Global Currency Reserve System” that there will be short-term pain, but, in the long run, it will benefit the U.S. economy. The subject is complicated, but the bottom line is that reserve currency dominance has resulted in the destruction of our manufacturing base and the buildup of a massive federal debt. Sharing the reserve currency load would have the effect that sanctions are having on the Russian economy – nurturing domestic industries as a tariff would, allowing the American manufacturing base to be rebuilt. 

Other commentators also say that being the sole global reserve currency is less an exorbitant privilege than an exorbitant burden. Losing that status would not end the importance of the U.S. dollar, which is too heavily embedded in global finance to be dislodged. But it could well mean the end of the petrodollar as sole global reserve currency, and the end of the devastating petroleum wars it has funded to maintain its dominance. 

________________________________

This article was first posted on ScheerPost. Ellen Brown is an attorney, chair of the Public Banking Institute, and author of thirteen books including Web of Debt, The Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com. 

Off the Top of My Head

The US Debt Ceiling is Totally Artificial and Unnecessary

by John Lawrence

Fact: the US has a sovereign fiat currency and can create and spend as many dollars as it wants. Fiat means that the US dollar has value only because the government says it does. It is not redeemable for gold or any other precious metal. Sovereign means that is not pegged to any other currency. It can't be exchanged at a fixed rate for any other currency or anything else. The exchange rate for other currencies is floating. Fact: the US creates its own money and can spend it as it pleases. Fact: "deficit" spending adds money to the real economy which creates and enhances economic activity and adds to GDP. Fact: most recessions occur when the US tries to balance its budget. Long story short: the debt ceiling allows the US to hoist itself on its own pitard!

The Federal Reserve prints the money. That's why the dollars your are carrying around in your pocket say "Federal Reserve Note" on them. It can print as many dollars as are authorized by the US Congress. The US government budget is not dependent on having tax dollars to spend. When the US "deficit spends" it creates Treasury bonds which it sells to the public. However, the Federal Reserve and other central banks are buying back a lot of these Treasury bonds so, effectively, US debt just becomes a number on the Fed's balance sheet which is of no consequence. The Federal Reserve can create with a few keystrokes on a computer as much money as it wants and deposit it in the US Treasury's account. The moral of the story is that the national debt can not and should not ever be paid off. To do so would ruin the economy since it would extract money from the real economy which would lower GDP. The correct assessment of the national debt is that it is just a number on the Fed's balance sheet!

The conversation.com reports:

"There is no limit to the quantity of money that can be created by a central bank such as the Bank of England. It was different in the days of the gold standard, when central banks were restrained by a promise to redeem their money for gold on demand. But countries moved away from this system in the early part of the 20th century, and central banks nowadays can issue as much money as they like.

"This observation is the root of modern monetary theory (MMT), which has attracted new attention during the pandemic, as governments around the world increase spending and public debts become all the more burdensome.

"MMT proponents argue that governments can spend as necessary on all desirable causes – reducing unemployment, green energy, better healthcare and education – without worrying about paying for it with higher taxes or increased borrowing. Instead, they can pay using new money from their central bank. The only limit, according to this view, is if inflation starts to rise, in which case the solution is to increase taxes."

The addition of too much money by government to the real economy can cause inflation. Taxes extract money from the real economy. Joe Biden's Build Back Better human infrastructure bill is totally paid for so it will not cause inflation. It does this by extracting as much money from the real economy as the government is spending into the real economy, and it does this by taxing the rich which has the added salubrious effect of reducing economic inequality. This is one of the goals of the Biden administration: to reduce economic inequality which is what the human infrastructure reconciliation bill actually does. This is why a higher amount spent on this bill is better. The more spent on human infrastructure, the more money is transferred from the rich to the poor and middle class. Progressives know this. Republicans do their best to obfuscate this. Recognition of this fact will help to move the US and other countries with sovereign currencies into a post-capitalist world, and allow for more resources to be dedicated to fighting climate change.

Off the Top of My Head

So What's Wrong With Means Testing Biden's Human Infrastructure Plan?

by John Lawrence

Progressive Democrats want universal free Pre-K. Joe Manchin wants to means test it. That means that rich Americans would still pay and poor Americas would not. Not a big problem, I say. In fact I think social security should be means tested. Why should billionaires or people with retirement pensions of over $100,000 a year get social security? Spend the money on the poor and middle class. I'm with progressives on most things, and I certainly want Joe's Build Back Better program implemented. But if you can bring the cost down by means testing and this would lead to its passage, let's get on with it. Furthermore, the military budget can be cut because we are no longer spending $300 million a day in Afghanistan. Manchin is actually for most of Biden's Build Back Better plan. He just wants it in a different form so that it's not universal meaning a giveaway to all concerned, rich and poor alike. Progressives want rich families and poor families to enjoy free pre-K and free community college.

Manchin is not against taxing the rich or a modest effort towards climate change either. His objections seem to be more about fiscal prudence than any of the elements of Biden's plan. Sinema, on the other hand, is the more sinister of the two when it comes to tanking Biden's plan. She doesn't want taxes raised on the rich, for example, and she doesn't want Medicare to be able to negotiate with pharmaceutical companies in order to bring the cost of drugs down. Manchin wants the Hyde amendment included in the bill which prohibits Federal funding for abortions. Big deal. That's the way it is now. Progressives should be able to live with the Hyde amendment. Nothing is changed. Manchin is an old line fiscal hawk when it comes to deficit spending, but as Modern Monetary Theory has made clear Deficits Don't Matter. Inflation, however does, but taxing the rich removes money from the economy and reduces inflation while paying for everything in Biden's reconciliation bill is inflation neutral.

When all is said and done, the proposed money to be spent on social infrastructure pales in comparison with the money spent on the military budget over the next 10 years. A conservative estimate is that the US spends $725 billion a year on defense. It's actually closer to a trillion when you factor in other costs not usually counted like the cost of nuclear weapons and intelligence services. For instance, future medical and disability costs for Iraq and Afghanistan veterans will total between $2.2 trillion and $2.5 trillion. So over a ten year period, military related costs will approach $10 trillion. Progressives want $3.5 trillion for social infrastructure over a ten year period, a pittance compared to military related costs. However, progressives and moderates will haggle over the cost until, eventually some compromise will be come up with, probably around $2 trillion or $200 billion per year. Reducing the defense budget will also calm fears over inflation as will the Fed's backing off from quantitative easing. Manchin is a reasonable person, but Sinema is the wild card who singlehandedly could tank both bills.They need to get the reconciliation bill fully fleshed out and negotiated on and ready to go so that both the bi-partisan and reconciliation bills can be voted on simultaneously in both Houses of Congress.

Off the Top of My Head

The Infrastructure Bill and How to Pay for It Are Two Separate and Distinct Issues That Have Nothing to Do With Each Other

by John Lawrence

We know that the US government does not have to tax in order to spend since the US has a sovereign currency (See Modern Monetary Theory), and the Federal Reserve can just place the requisite amount of money for the infrastructure bill in the Treasury's account at the Fed. The problem is that, according to US law, if there is not enough money in the Treasury's account to pay for stuff, it must issue and sell Treasury bonds to make up the difference. These bonds then contribute to the deficit which is added to the national debt. We also know that the national debt never needs to be paid off, but Treasury bonds do need to be paid when the holder asks for the money when they come due. In addition interest does need to be paid on them. If the Fed keeps the interest rate for Treasuries at zero, this is not a problem. So why would anyone purchase Treasury bonds if they get zero interest? Well, countries that peg their currencies to the dollar (like China) need dollars in order to conduct business. Besides if someone comes to them with a basket full of renminbi and asks for US dollars, they have to be able to pay them the dollars and accept the renminbi. So there is always a market for US Treasury bonds. Even if there wasn't, the Fed would end up purchasing them and taking them onto its balance sheet where they would essentially disappear into a black hole never having to be paid back.

So what is the problem with just having the Fed create the money and place it in the Treasury's account without "paying for" it with taxes. No problem really. Joe Biden just wants to kill two birds with one stone. The first bird is the money for infrastructure. The second bird is doing something about the widening economic inequality by taxing the rich. There is no actual need to issue Treasuries in the first place except that US law requires it. The money could just go directly on the Fed's balance sheet without the intermediate step of selling Treasuries. There are however some good reasons for not taking too much advantage of this possibility. One is inflation. As more money floods into the economy through deficit spending, inflation could heat up whether or not the money comes from taxes. The other issue is that as other countries accumulate more and more Treasury bonds with or without interest being paid on them, they start to have the ability to use those dollars to purchase US assets. It's not inconceivable that a particular country - let's say China - couldn't accumulate enough Treasuries to buy up cities.

New York City has the most valuable real estate in the U.S. at $2.8 trillion — slightly more than the entire GDP of the United Kingdom for 2019. In fact, this is greater than the GDP of all but just five countries — India, Germany, Japan, China and the United States. The value of New York is comparable to the combined market value of tech giants Apple and Microsoft. China owns about $1.1 trillion in US Treasuries. If they demanded it all tomorrow, the Fed would have no problem paying them, but then they could buy up more than a third of New York City or almost all of San Francisco valued at $1.3 trillion. This could eventually become a problem so it would be better not to even make up the difference by issuing Treasuries in the first place. The alternative is for the Fed just to create the money and place it in the Treasury's account as authorized by Congress without the Treasury having to sell bonds to make up the difference between the amount of taxes and the amount of the authorization.

Then the issue becomes inflation. There is already wage inflation as employers are forced to pay more for employees, for a number of reasons, thus raising the price of products and services. This is "good" inflation since wage earners have not seen an increase in their income for 40 years. There is also "bad" inflation in that the increasing wealth of the upper 10% , and especially the upper 1%, is causing asset inflation in terms of the increasing cost of real estate and rent. Asset inflation is also happening in the stock market although it's hard to see how this is a bad thing except for the fact that about 50% of the people don't own stocks so that gap between rich and poor is only increasing. The third form of inflation occurs when there is too much money chasing too few goods and services. This could be caused by too much deficit spending. The fourth kind is the "super bad" inflation known as hyperinflation. This is the kind of inflation that affected the Weimar republic in Germany before the Second World War and also affects poor countries. It also recently affected Greece because Greece gave up its sovereign currency when it adopted the euro. Hyperinflation occurs when a country needs to borrow money from the capital markets subject to increasing interest rates. As their economy declines interest rates go up until finally they are paying more in interest than their economies can keep up with. The US can never be put in this position since it never has to go to the capital markets to borrow money. The Federal Reserve can just issue whatever money is needed and can set its own interest rate since the US dollar is a sovereign currency.

So while there are limits to the amount of prudent deficit spending, one of them is not paying for it through taxes. The US Federal government never has to tax in order to spend. It can pass a bill to build infrastructure with the only limitation being the physical and material resources that are available to do it.

https://www.cnbc.com/video/2019/03/01/stephanie-kelton-explains-modern-monetary-theory.html

 

Off the Top of My Head

How to Pay For Infrastructure

by John Lawrence

Modern Monetary Theory (MMT) points out that neither social programs nor tax cuts need to be "paid for." A government such as the US with a sovereign currency can issue the money without having to tax first. Taxes are only necessary to control inflation. The biggest amount of inflation in the economy right now is the inflation of billionaires' wealth assets because their increases in wealth are not taxable. The IRS only taxes workers' incomes, not billionaires increasing asset wealth. That's why economic inequality is growing by leaps and bounds, and we need a wealth tax. But as for infrastructure, the Fed can just create the money in the Treasury's account at the Fed with a few keystrokes on a computer like it did when it bailed out Wall Street in 2008.

In The Deficit Myth, Stephanie Kelton writes (circa 2015):

"No one [on Capitol Hill] questioned the significant need for infrastructure investment. A trillion dollars, while ambitious, would have only taken a bite out of the problem. No one blanched at the price tag, but there was considerable debate about whether (and how) to pay for it.

"Before I tell you about that debate, it's important to understand what those words mean to lawmakers and their staffers on Capitol Hill. In truth, there is only one way to pay for anything. All federal spending is carried out in exactly the same way - that is, the Federal Reserve credits the appropriate bank account(s). But in Washington speak, you "pay for" your spending by showing that you can "find" enough money to cover the cost of whatever it is you're proposing to spend. It's all a game, really, and it's rooted in the flawed mental model [that the government needs to tax and/or borrow before it spends] that holds back so much of our potential. To avoid adding to the deficit, lawmakers look for ways to cover the costs of their proposed spending without borrowing. That means they usually go looking for new tax revenue."

As Kelton points out, the US doesn't need to tax before it can spend. Biden's wanting to pay for infrastructure by taxing the rich is not necessary to pay for infrastructure per se, but it is necessary to get unbounded economic inequality under control.

Kelton continues:

"So back to the debate over the trillion-dollar infrastructure ill. The conversation began with staffers being asked whether we thought a so-called pay-for should be attached to the bill. It was my first week on the job, so I was relieved when another staffer spoke up first. "No," this person began, "I think we should just do it as a clean bill." A clean bill meant writing a spending bill that didn't include any language abut how to pay for it. Another staffer agreed, and soon I echoed their sentiments. Our country desperately needed to make these investments. There was clearly enough fiscal space to do it, and infrastructure is one of the things that has traditionally enjoyed bipartisan support. Since the GOP was in control of the Senate, we reasoned, the bill would need at least some support from Republicans to pass. [Ha. Ha] Proposing a tax increase would guarantee defeat. Not everyone agreed. Another staffer objected that the press wouldn't take the legislation seriously unless it specified exactly how it would be paid for. In the end, the bill included a proposal to raise revenue by closing a variety of tax loopholes that overwhelmingly benefit the rich. Needless to say, the legislation did not pass. Meanwhile, the latest ASCE [American Society of Civil Engineers] report card shows how deferred maintenance is catching up with us, as the cost of our needed improvements has climbed to a whopping $4.59 trillion."

Is it deja vu all over again? Is it gridlock or spinning our wheels as infinitum? Is it Republicans thinking it is more important to defeat Obama's and now Biden's agendas than it is to prevent bridge collapses?

Kelton's point is that the US doesn't really need to "pay for" anything by taxing first or finding the money first. "In 2017, a 1215-page bill, known as the National Defense Authorization Act, sailed through the Senate with a vote of 89-9. The White House had requested $700 billion, but the Senate had authorized $737 billion, kicking in another $37 billion without hint of concern about where to "find" the money. They simply voted in an overwhelmingly bipartisan way to increase the Pentagon's discretionary budget."

Yet the Pentagon budget has not protected us from international ransomware attacks nor domestic terrorists. May I submit that the money is misspent and misdirected? Instead of going where the money is really needed it goes to the vested interests in the military-industrial complex who continue to justify war in order to line their own pockets.

Kelton continues: "That might seem like a double standard. As Congresswoman Alexandria Ocasio-Cortez put it, "We write unlimited blank checks for war. We just wrote a $2 trillion check for the GOP tax cut, and nobody asked those folks, 'How are they going to pay for it?' She's right. Somehow, there's always money for war and tax cuts. For just about everything else, however, lawmakers are expected to show that they can "pay for" their spending."

As MMT has shown, the US government does not need to tax or borrow in order to spend. Taxation is necessary to control inflation, to extract money from the economy if there is too much of it out there chasing too few goods or services. Right now there is too much money out there in the hands of billionaires that should be extracted in order to prevent runaway financial inequality. But it is not necessary to tax before money can be spent on infrastructure or anything else. There are limits, and the limits are the material and human resources that are available to soak up that money by providing constructive economic activity like building infrastructure. Hyperinflation like what happened in the Weimar Republic or even Greece cannot happen in the US because the US never has to go to the capital markets to borrow money at prevailng interest rates. The US central bank, the Fed, issues whatever money is necessary to pay US bills and that includes any money appropriated by Congress whether for war, tax cuts or building infrastructure.

https://www.youtube.com/watch?v=a9pAPIUYXxQ

 

Off the Top of My Head

Our Grandchildren Won't Have to Pay Back Money Spent on a Green New Deal, But They Will Pay With Their Lives if We Don't Do It Now

by John Lawrence

It's a myth that a sovereign country with a sovereign currency and a floating exchange rate has to borrow money to pay its bills. The US can just issue the money. It doesn't need to tax in order to spend. So why isn't the US as well as all the other nations with sovereign currencies such as Japan, Britain and China going all out to supply as much money as necessary to prevent global warming from "going viral" as they say? The only restraint is the question of whether the human and physical resources to do the work are available. In a society such as China, if the government wanted its people to stop whatever they were doing and become part of the work force to forestall global warming, it would be done. In the US it would not be so easy to commandeer workers to leave their jobs as servers, bartenders, chefs, dealers, workers at Disneyland, workers on cruise ships etc to leave their jobs and go to work in Joe Biden's global warming and infrastructure rebuilding work force. The businesses large and small would have a conniption fit like they're having now getting these workers back to work because their pandemic unemployment has not run out.

The only time when workers went all out to solve a major global problem was World War II. Rosie the Riveter and all the others joined the work force to defeat Hitler. They even were willing to defer consumption so that the financial and material resources that were necessary weren't spent in the consumption market thus letting the necessary physical resources be available for the war effort. Today we have a nation consisting of a bunch of spoiled brats who wouldn't do anything the government asked them to do crying that their "freedom" to do whatever they wanted was paramount. We live in a society composed of consumers who demand to be endlessly entertained by movies, TV, theme parks cruise ships, athletes, restaurants, social media and Las Vegas. Half the country works as servers, baristas, bartenders, housekeepers, actors, athletes, dealers, entertainers and such like jobs to entertain the top half. Some of these are highly paid; most are not. Such was the nature of the "full employment" society before COVID hit. It was a full employment society consisting of trivial jobs at minimum wages for the most part. Biden will have to persuade workers to leave their jobs in the "entertainment" industry in order to create actual results in the real world such as building green infrastructure. The entertainment industry will not be pleased nor will the upper half of society which demands to be continually entertained. 70% of US GNP is consumption and a lot of what people want to consume is encompassed by sports bars, travel and tourism, the leisure and hospitality industry in general. The spoiled brats think its their birthright to have such services available, and the last thing they want to do is to roll up their sleeves and join a union.

Together with the presumed right to be entertained, we have a large percentage of the country that has been processed through the military and developed this consciousness that military prerogatives should prevail uber alles. These are the insurrectionists and Trump supporters that want civilian society to reinforce military values such as command and control. They want an autocrat for President. Freedom is the only value that counts for them. Democracy, equality, fraternity, social equity don't matter. They want to preserve the American way of life which, in addition to a right to be entertained wherever and whenever they have the resources to consume, includes also the right to exclude the prerogatives of minorities for social justice. Is it any wonder that the insurrectionists in January 6 contained a large number of current and former members of the military and police forces? Their attitude is that whatever is good for the military is good for American society in general. The military has become a way of life and consciousness for them. They think that, because they served, they are entitled. Spoiled brat militarists I'll call them. The endless wars, bloated military-industrial complex budget and the military bases in practically every country in the world provides the economic and job base of the nation unfortunately.

Biden thinks he is out to prove that American democracy can compete in the civilian world on an equally competent basis with other countries. That will be a hard nut to crack. The US is dooming itself in two ways: the First and Second Amendments to the Constitution. Let's take the Second Amendment first. In no other major country in the world do citizens have a right to unlimited uncontrolled gun ownership including military style weapons. This is producing news cycles when, hardly is one mass murder out of the way, than another one comes along to dominate the news. The news channels can hardly keep up with them all. No other society including The US' major competitors would tolerate such a situation. The Second Amendment has become toxic and perverted, and in and of itself is enough to doom the US to second class status. In addition to that the First Amendment has become toxic and perverted, and the major reason for that is social media. Social media makes possible the vicious spread of toxic lies and untruths. Witness Trump's use of Twitter to corral and consolidate his followers around the thesis that he, not Biden, actually won the election. Social media allowed him to rally his supporters based on angry themes and memes connected with white supremacy and a return to the good old days when white, Protestant Anglo Saxons ran the country, the good old days when Negroes knew their place in society, the good old days when you didn't have multiple nationalities and religious groups asserting their rights under the Constitution to live freely and enjoy all the perquisites of American society, the good old days when gas guzzlers were the only vehicles in town and no one need be concerned about anything except maximizing their profits and living the American Dream, where the American Dream consisted of having more stuff than your parents did.

Joe Biden's first 100 days have been remarkable in that he has been able to get as much accomplished with slim majorities in both Houses of Congress. Is this enough though to move America forward at the pace that China, for instance, is moving? China is a more or less unified society. 99% or more of Chinese citizens are on the same page as the Chinese government. China is winning friends and allies all over the world with its Belt and Road initiative while the US withers away its resources on endless wars and confuses its allies with the possibility of radical swings with each change of administrations. China's military budget of $183.5 billion is dwarfed by a US military budget 5 times that amount. The US is a divided country where one of the major parties base their appeal on lies and deception, and its supporters are only too willing to eat it up because it's entertaining and represents military values of command and control. Good government, as Biden has illustrated, is somewhat boring because it is based on solving real human problems. Let's hope that Biden's version of reality based on truth and problem solving wins out over the lies based reality of the other side, and the US, even if it doesn't remain the world's dominant power, can become a constructive member of the world community helping to solve problems at home and abroad.

The Fatal Design Of Debt-Based Money | Jem Bendell, Richard Wolff, Stephanie Kelton

The Guardian view on Biden’s 100 days: going big, but not big enough

from the Guardian:

The US president is right to spend, but shrinking the federal deficit is not the priority

‘Mr Biden’s economic team understands that a strong economy benefits the bottom half of America most.’ Photograph: Brendan Smialowski/AFP/Getty Images

Fri 30 Apr 2021 12.51 EDT

Last modified on Sat 1 May 2021 01.31 EDT

Joe Biden’s first 100 days in office signalled that the future does not have to be a rerun of the past. The US president’s speech to Congress this week made it clear that Trumpism was a warning from history, a reminder that no republic is guaranteed to last. The US remains in danger – its decline accelerated by an iniquitous economic model, and by leaders unable or unwilling to remedy it. It is a relief to find in the White House a president who wants to bridge divisions rather than widen them. Mr Biden should be praised for saying he will stop the rot and recognising the challenge to democracy posed by autocracy. But his response risks being undone by an obsession with containing non-existent fiscal risks.

The Biden White House proposes spending $4trn, with about half the money used to rewrite the social contract. The rest will create jobs, with infrastructure investments to repurpose the post-Covid economy for a zero-carbon world. The problem is not that money is being spent to fix a broken society. Neither is it wrong to ask the rich to pay their fair share of tax. The problem is that Mr Biden says spending must be balanced by tax rises or savings from other government programmes.

This is a self-imposed and self-defeating constraint. It seems bad economics to pay for every dollar invested in early childhood education when each greenback yields $7.30 in benefits. A number of centrist Democrats have already signalled their opposition to the proposed tax hikes. If Mr Biden wanted cash, he could back the Internal Revenue Service to go after the $1tn in unpaid taxes every year. With a razor-thin Democratic majority in the US Senate, there is a risk that privileging arbitrary fiscal limits will lead to laws not being enacted or spending being pared back to match reduced revenues.

Mr Biden’s intention to bust a failed economic paradigm is a good one. It would be a scandal if it were sacrificed on the altar of budget neutrality. The threat to liberal democracy is not from fiscal incontinence but political polarisation. America has spent decades running up large deficits with no adverse macroeconomic consequences. In Washington, a debt crisis always seems to be coming. Yet it never arrives. The nation is increasingly endangered by growing levels of inequality, financial instability and ecological calamity. The Gilded Age looks egalitarian compared with the emerging concentration of riches. Either democracy must be renewed by freeing the state from ideological restrictions or wealth is likely to cement a less democratic regime.

It makes little sense for Mr Biden to elevate balanced budgets when the country faces existential choices, a point recently made by two Obama-era White House economic advisers. No one doubts the sincerity of the Biden team. The question is whether they have subordinated the scale of the crises to congressional politicking. Columbia University’s Adam Tooze pointed out that the president’s climate spending amounts to about 0.5% of US GDP, an amount 10 times smaller than that required to decarbonise the economy. The economist Stephanie Kelton wrote that to accommodate such large expenditures, the Biden administration “would have to develop a robust plan with a focus on containing inflationary pressures”. These are the arguments that Mr Biden should be having with his party, not whether the wealthiest ought to pay for anti-poverty programmes.

It is better to let the government’s fiscal balance settle to whatever level is required to deal with the multiple emergencies the US faces, given the spending and portfolio decisions of the private sector. It is not the case that the government’s ability to spend is constrained by budgetary accounting or temporary while interest rates remain low. The US Federal Reserve’s bond-purchasing programmes can control yields. Mr Biden’s economic team understands that a strong economy benefits the bottom half of America most. However, his spending plans threaten to centre the debate on reducing the deficit rather than rescuing the country.

Biden Can Go Bigger and Not ‘Pay for It’ the Old Way

By focusing on how much revenue they hope to raise from tax increases on the well-off, Democrats risk limiting the scope of their ambitions.

by Stephanie Kelton, April 7, 2021

Last week, President Biden introduced a $2.2 trillion infrastructure plan in a speech, calling it “a once-in-a-generation investment in America.” And on Wednesday, he and the Treasury Department outlined many of the package’s details, including how to “pay for” it. A close look at those so-called pay-fors, however, shows Democrats are thinking about fiscal responsibility the wrong way. They could be on the verge of sparking some unpleasant short-term overheating of the economy, in which price increases accelerate and the purchasing power of our dollars falls somewhat. If the final legislation were to grow much larger — toward the $10 trillion level many progressives in Congress are pushing — it could send such inflation soaring.

In an interview on MSNBC last week, Representative Alexandria Ocasio-Cortez of New York explained her mixed feelings about the president’s proposal, saying she has “serious concerns that it’s not enough to realize the very inspiring vision that Mr. Biden has advanced.” Rather than spending roughly $2 trillion over eight years, Ms. Ocasio Cortez and many of her Progressive Caucus colleagues would prefer “to go way higher” and on a shorter timeline.

She’s right that it is possible for Congress and the Biden administration to go bigger, faster — but only by shifting to a completely different budgeting framework: Instead of passing legislation that leans on taxing corporations and the rich to keep spending from increasing the deficit, they would have to develop a robust plan with a focus on containing inflationary pressures as that heightened government spending hits the real economy.

The president called his plan “fiscally responsible” during his speech simply because it will raise more revenue than what he’s proposing to spend. On paper, and according to conventional wisdom, this is a balanced policy. It may satisfy the scorekeepers at the Congressional Budget Office or even earn high marks from deficit hawks. But because these proposed hikes fall exclusively on corporations and more affluent Americans — who have a relatively high marginal propensity to save rather than spend — the taxes may not diminish enough private sector spending to prevent the government’s own increased outlays from igniting some inflationary overheating, especially if Congress does “go way higher.”

Off the Top of My Head

Joe Biden's Trillion Dollar Budget Plan

by John Lawrence

Don't worry about how to pay for it. Any nation with a sovereign currency (let alone the world's reserve currency) and a floating exchange rate can never go bankrupt. The Federal Reserve can issue the money. In fact in the real world this is exactly how it works for any budgetary legislation passed by Congress and signed by the President. Let's say, for example, Biden's $2 trillion infrastructure plan is signed by him into law. The US Treasury has an account at the Federal Reserve bank. Let's say there is only a trillion dollars in that account. What happens next is that the Fed just augments the Treasury's account by a trillion dollars by means of a few keystrokes on a computer. Bingo the government now has all the money it needs to spend on infrastructure. It didn't have to receive tax money in advance of the money it needed to spend. At the same time the Treasury Department creates a trillion dollars worth of Treasury bonds and sells them to the primary dealers who are required by law to buy them. These are mainly big Wall Street banks. These banks sell the bonds in the secondary market. If they can't find enough buyers, the Fed "adds liquidity to the market" by taking the Treasuries onto its balance sheet in return for marking up the Wall Street banks accounts at the Fed with the appropriate amounts of cash. Now everybody is happy. The US government has the money it needs in its Treasury's account at the Fed. The Wall Street banks have plenty of liquidity in their reserve accounts at the Fed, and the amazing thing is that it didn't require any money from additional taxes.

Another amazing thing is that most politicians are totally ignorant about how government financing actually works. The Republican Governor of Ohio, Mike DeWine gets on TV and opines about the fact that the US is going into too much debt and how will our grandchildren ever pay it off. "Here in Ohio," I'm paraphrasing," we have to pay our bills and pay down our debts. Every household has to be fiscally responsible and pay their debts." Well households and states are in a different category from the Federal government. They actually do have to pay their debts. So what he is claiming is a half truth. States and households cannot issue a sovereign currency whereas the Federal government can. States and households use the Federal government's currency. The big lie, however, is that the US government has to pay off its debts. It never does, and no entity can force it to do so. The other constraint that Larry Summers and others worry about is inflation or currency devaluation. Inflation could be a problem, and that problem, should it arise, can be dealt with by sucking money out of the economy by means of taxes. Biden's plan to tax the rich will suck some of their superfluous wealth out of the economy thus forestalling inflation while tending to reduce the runaway economic inequality that is now threatening democracy in the US.

The Federal government is not like a household or a state. Households and states actually do have to pay back the money they borrow plus interest. That's why it's so important that the various COVID rescue plans provide the states and municipalities with money. Otherwise, they could become financially insolvent and go bankrupt like Orange County in California did a few years ago. Birmingham, AL also got itself in hot water and went bankrupt. Countries in the Euro zone have the same problem as states in the US. They gave up their sovereign currencies when they joined the EU. So now countries like Greece and Italy have to beg the European Central Bank for relief, relief they could have provided for themselves if they had retained their sovereign currencies like Britain did. Britain will not have any problem with financial shortages because, like the US, its government can issue whatever currency is deemed necessary to weather any storm.

So in addition to the Big Lie that Trump won the election, politicians of both parties are perpetrating another Big Lie that the US actually has to borrow the money to pay for Biden's trillion dollar infrastructure and safety net programs. Some politicians, like Bernie Sanders and AOC, actually know the truth, and, evidently, they have convinced Joe Biden thereof as well although they won't actually come out and say it to the media: the US government can just issue money into the private economy. It doesn't need to borrow it or even tax for it in advance in order to spend. So the real policy of the Biden administration is not tax and spend. It's spend and maybe tax later, but target those taxes on the wealthiest among us. As opposed to the Republican philosophy of giving tax breaks to the wealthy and taking the social safety net away from the poor.

Off the Top of My Head

The Caring Component of Biden's Infrastructure Plan

by John Lawrence, April 6, 2021

It's about time that the need for a caring infrastructure is addressed. Caring used to be supplied almost entirely by wives when wives didn't work outside the house. However, they did considerable work inside the house caring for children, sick relatives and elders in addition to taking care of their husband's needs. Now that most wives are required by economic necessity to work outside the home, there is a need for child care for young children not old enough to attend school. There is a need for pre-K education plus babysitting services. Older family members have special needs for care giving as well. Who is to provide for this if wives are in the work force? Rich people can pay tuition for pre-K and child care as well as hiring caregivers for older relatives or paying for senior living facilities. For poorer people, wives have to do all this themselves in addition to working to provide income for the family.

That's why Biden's initiatives provides for a caring infrastructure. However, it is insufficient. The Guardian reported:

Just as our physical infrastructure is crumbling and requires substantial reinvestment in a 21st-century economy, our care infrastructure is fundamentally broken. As the only industrialized country in the world without a national paid family and medical leave program, only 17% of our people have paid family leave through their employers. Hundreds of thousands face daunting waitlists for essential home care. Childcare is the highest household expense for families in much of the United States. And the median annual pay of childcare and home care workers is $25,510 and $17,200, respectively, leading to high turnover and reliance on public assistance.

In the past most elderly people on Medicaid that needed care giving were forced into institutional care like nursing homes. There was no comparable funding level that provided care givers for people to stay in their own homes. Biden's care infrastructure corrects this anomaly by providing money for care givers to provide care outside of nursing homes and other institutions. However, the limitation is that people who qualify for either nursing homes or home care must be on Medicaid. Basically, this means that they have no assets. They could stay in their own home only if they don't own it. If they owned it, that would be considered an asset that would disqualify them from being on Medicaid. So older people on Medicare, but not Medicaid would not qualify under Biden's "care infrastructure" initiative. People with assets like home ownership usually want to pass those assets on to their children. It represents the intergenerational transfer of wealth. That's how white people have built wealth over the generations whereas black people, who were by and large prevented from owning their own homes after WW II, are by and large renters.

Elderly renters are mainly poor people who live off of social security which hardly provides for a decent living much less the intergenerational transfer of assets once the person dies. Biden's pre-election agenda called for an uping of social security payments so that people could have a decent existence just based on social security alone. It also called for an increased amount of social security for people who had been on social security for 20 years, in other words, the really old. The Boston Globe reported:

A critical part of Biden’s campaign plan was not only raising funds for Social Security but also expanding the benefits to reduce poverty among elderly Americans. It would, for example, ensure that benefits for workers who were in the labor force for 30 years or more would be at least 125 percent of the federal poverty line. The oldest beneficiaries would also receive a bump to offset dwindling retirement savings, and widows and widowers would receive a 20 percent increase so that their Social Security benefits don’t get cut in half when their partner dies.

The reason that Biden didn't include this in his "caring infrastructure" initiative is that the cap on wages subject to the payroll tax would (in the minds of politicians) have to be raised to "pay for" it, and Biden has promised not raising taxes on anyone making less than $400,000 annually. Right now, payroll taxes that go toward funding Social Security are capped at the first $142,800 of a taxpayer’s income. First of all the social security trust fund is basically a hoax. Money is available for social security in the same way that money is available for COVID relief, infrastructure and even tax cuts. As Modern Monetary Theory points out, the Federal Reserve creates the money without the need of taxes to pay for it. The same is true for social security. But Biden did not want to complicate the discussion around his infrastructure plan so he left his plan for social security increases behind presumably to be brought up at a later date.

There is much talk about enlisting the help of Republicans for Biden's infrastructure initiative, but it is a not a secret that Republicans will help with nothing Democrats want to do. The working across the aisle thing is a loosely held fiction. Democrats know that they must pass all Biden's bills just with the slim Democratic majority. That gives Joe Manchin of West Virginia, the most conservative Democrat, enormous power. You can bet your booty that West Virginia will get more than their fair share of roads and bridges. He wants to not raise the corporate tax rate to 28% as Biden as suggested. Big deal! Again tax money is not required for government spending. The Federal Reserve just issues the money, and then the Treasury Department sells the bonds. What bonds can't be sold to individuals or foreign governments end up on the Fed's balance sheet. The deficit between money spent and tax money collected is irrelevant. Taxes are only relevant to reduce income inequality as long as they are targeted on the rich. The Fed controls the interest rate, and as long as it keeps it at about zero, the Federal government can keep the amount of money it spends on interest under control.

Off the Top of My Head

The Stock Market is Too Big to Fail

by John Lawrence, April 2, 2021

Just as the big Wall Street banks are too big to fail, so now is the stock market. The stock market will never take another radical dive downward because the Federal Reserve won't let it. The way the economy is shaping up Treasury bonds, which hardly pay any interest, are just a safe place to store your money and also for foreign nations which need the world's reserve currency (the US dollar) to have a savings account because they need dollars to conduct business. There is no worry that the US will have to pay off the trillion dollars in Treasuries that China owns because they need those dollars to do business with the US and other nations. If they did want to dump all their Treasuries for some reason the Fed could just create the money to pay them and effectively take the Treasuries on its own balance sheet.

So the stock market is the only game in town for those who want to actually "invest" their money. There is so much 401(k) money in the stock market that that is reason enough to never let it fail. Instead it will continue on its merry way upward while the Fed keeps interest rates at approximately zero so that not much in the way of interest will have to be paid on US debt. There is no reason to fear that Joe Biden's $2 trillion infrastructure plan will bankrupt the US. Since the US dollar is a sovereign currency, the Fed can print as much money as it wants. If international investors don't want to buy this debt, it ends up on the Fed's balance sheet which is an effective black hole from which it never has to emerge.

Then why is there all this kibuki theater about "how to pay for it," the $2 trillion infrastructure plan I mean. It's just that most Americans including most Congressmen are under the illusion that a country with a sovereign currency like the US faces any constraints in paying for anything. Well, there is one constraint - inflation. This is probably of little concern as long as the money is targeted at the lower middle class an the poor which haven't seen wages rise in 40 years. The real inflation in the economy is the asset inflation that the rich are mostly responsible for. That includes the stock market and real estate. Inflation in the stock market will be carefully controlled by the Fed. We've seen that the stock market moved up even during the pandemic. The real problem is inflation in the real estate market which has made housing unaffordable for many. It continues to get worse as the extra dollars the wealthy have to invest are driving up prices. That's why it makes sense to tax the rich ostensibly to pay for the infrastructure bill. The real reason, however, is that inequality is getting out of hand in the American and the world economy. Taxing the rich is the only effective means to reduce inequality to a reasonable level. It will also help to bring inflation in the real estate market under control.

The real problem that Biden's infrastructure bill will have to deal with is changing the nature of the US economy. When the economy was in full employment under Trump, there were still 4% unemployed. 5% unemployment is considered "full employment," but that still leaves about 15 million people out of work. Biden's infrastructure plan will put those 5% back to work. It had been considered by conservative neoliberal economists that 5% unemployment was necessary to ward off inflation, but that theory has been debunked by Modern Monetary Theory. While inflation will still be a concern with all of Biden's stimulus spending, the main concern is restructuring the US economy from an entertainment economy to a constructive labor economy. Trump's economy was arguably a full employment economy (except for the 4% unemployed), but it was an economy the jobs of which were mainly in the entertainment and military industries. In other words, in my opinion, it was an economy based on false unbeneficial values. An economy based on labor participation rebuilding American infrastructure will be an economy based on necessary and fundamentally beneficial values. This might mean that some of those presently employed in frivolous industries might be incentivized to change jobs. Reducing the entertainment and military sectors while increasing those employed rebuilding infrastructure would be, in my opinion, be a good thing.

 

Off the Top of My Head

Biden's Infrastructure Initiative: Don't Worry About How To Pay For It

by John Lawrence, March 30, 2021

Even Republicans agree that there is a need to upgrade the infrastructure of the US. But they don't want to raise taxes to pay for it. Good news! You don't need to pay for it with tax money. The US dollar is a sovereign currency. That means that the central bank, in this case the Fed, can just create the money. In fact this is how it's always been done. The deficit is just an accounting regime. Money created by the Fed need never be paid back. It just goes on the Fed's balance sheet. This is a fact known and agreed to by most economists but many politicians and the American public are totally ignorant of this basic fact about how the economy works. Modern Monetary Theory has attempted to explain it in books like "The Deficit Myth" by Stephanie Kelton. So why does Biden also propose tax increases on the rich to pay for it? These are really two separate issues. Taxes need to be raised on the rich to try to bring into balance the skyrocketing financial inequality that has been occurring, not to pay for the infrastructure bill. Why do politicians including President Biden continue to perpetuate the myth that appropriations bills need to be "paid for." Why don't they just come out and say the truth - that a nation with a sovereign currency can never run out of money?

When just a few people own most of the wealth, we're back in a neo-feudal society where the rich control the political process, and the rest of the people are merely peons who don't really have a stake in the society at all. The Republican attempts to change the voting laws to suppress the minority vote is a way to cement that fact in American society. That's why it's so important to liberalize the voting laws so that every American citizen is encouraged to vote, not discouraged from it. So the infrastructure initiative is really two or even three pronged: rebuild infrastructure such as roads, bridges, ports, rail lines, airports and broadband thus putting millions back to work in good paying jobs. Secondly, to build back better in the sense that, insofar as possible, address the problem of global warming, and, thirdly, to make a first step in addressing economic inequality. All these things are important.

The only thing to watch out for while spending all this money is inflation, and some economists like Larry Summers are already sounding alarm bells over that. By taxing the rich and corporations money will be sucked out of the economy thus tending to reduce inflation. If sucking money out of the economy reduces inflation, then the sucking must be addressed to those areas where excess money really exists: namely, the rich and corporations who have been getting away with murder for years under both Republic and Democratic administrations. Forbes reported that "The 3 Richest Americans Hold More Wealth Than Bottom 50% Of The Country." Forbes ought to know. Perhaps with Biden's plan to tax the rich, it'll take 10 of the richest to equal the bottom 50%'s share. As for inflation, so much money in so few hands has already produced asset inflation in the form of rising housing and rent prices making it problematic for the young and the poor to support themselves especially at a minimum wage that hasn't increased in 50 years. What Summers doesn't understand is that the inflation that has occurred has been in the money that has been made by the rich which is actually wealth inflation, not in the form of wage inflation of the poor and middle class. Therefore, in turning this process around Biden's infrastructure bill is actually pointing the American economy in the correct direction.

Off the Top of My Head

Inflation Probably Not a Problem If Biden Programs Are Carefully Targeted

by John Lawrence, March 14, 2021

Critics have said, "Oh, My your children and grandchildren are going to have to pay back all these trillions of dollars that have been spent by both the Trump and Biden administrations on COVID relief and to get the economy going again." Not True! Modern Monetary Theory has shown that the Federal Reserve can just create the money and the Treasury Department can just spend it without ever worrying about paying it back. Finance is not the problem. The problem is potentially inflation which economist Larry Summers has sounded the alarm about. Most of Biden's relief bill is targeted at the poor which means that that money will be sucked up to pay past due rent and mortgage bills as well as providing a decent lifestyle which should not be inflationary except if you believe the nonsense of the neoliberal Phillips curve which supposedly proves that a certain segment of the population has to live in poverty and penury in order to fight inflation. That has also been debunked by Modern Monetary Theory although most politicians are still on the wavelength of neoliberal economics which has been shown to be fallacious in this and many other regards.

State and local governments likewise will just suck up the money in the relief bill to bail themselves out of debt and provide an adequate level of social services. This also is not inflationary because the money will not be just sloshing around in the economy with nowhere to go. What is inflationary is tax breaks for the rich, but this money can be sucked out of the economy by taxing the rich. What Larry Summers fails to take into account is that the US and much of the rest of the world has a two tier economy. The rich and upper middle class are doing very well, thank you, while the lower middle class and the poor are suffering. The COVID pandemic illustrated this in even starker terms with the so-called K-shaped recovery. The upper classes made money; the lower classes are on the verge of losing whatever financial gains they had made during the Trump economy. Inflation is caused by too much money sloshing around in the economic system. Most of that inflationary money is held by the rich in assets like stocks and real estate. Money injected into the economic system targeted at the poor is immediately sucked out of the system to pay debts and to provide basic necessities. There is enough physical and material capacity in the system to provide basic necessities so this money is not inflationary.

Inflation is caused when there is too much money chasing too few goods. As long as there is the material and human capacity, money directed at those sectors of the economy will not cause inflation. The real problem in future Biden administration bills involving infrastructure and the Green New Deal is that the materials to build out infrastructure, namely, steel, cement and plastics, require fossil fuels to manufacture and the manufacturing processes themselves are inherently carbon dioxide emitting. This comes about from basic chemistry which involves the carbon and oxygen atoms every step of the way. Most basic materials are composed of carbon, oxygen, hydrogen and nitrogen, and the chemistry involved in manufacturing releases large amounts of carbon dioxide. The manufacture of solar panels requires mining high quality quartz and combining it with coal. It's hard to get away from fossil fuels as the Michael Moore movie, Planet of the Humans, pointed out. For this reason spending large amounts of money on infrastructure involving cement, steel, plastics and other materials could actually produce more global warming rather than preventing it. The finances are available; the proper materials are not. The manufacture of wind turbines and solar panels require the release of large amounts of greenhouse gasses.

Because of these fundamental limitations regarding materials, it doesn't make sense to throw trillions of dollars at either infrastructure or global warming mitigation. That would be either inflationary or misguided in the sense that large projects in these areas could produce even more global warming. As Bill Gates has pointed out, money should be invested in promising startups and research that can solve these basic problems and into digital nuclear which is the only renewable energy source that won't result in a lot of greenhouse gasses being created in the first place. Advanced nuclear is the most promising source of clean energy. Gates has invested in a company TerraPower which does research on advanced nuclear reactors. Their mission statement reads:

"TerraPower was founded by Bill Gates and a group of like-minded visionaries that decided the private sector needed to take action in developing advanced nuclear energy to meet growing electricity needs, mitigate climate change and lift billions out of poverty. Advanced reactors and other isotopic applications are now possible with technology and enhanced computing capabilities that were unimaginable a few decades ago. At TerraPower, we are innovating in nuclear to improve the lives of people everywhere and to build the clean energy of tomorrow – today."

So when the Biden administration gets around to their initiatives on infrastructure and global warming, they need to heed Bill Gates' warning about traditional manufacturing methods involving cement, steel and plastic. Energy from solar and wind are inadequate to solve the problem for many reasons. Large scale demonstration and build out of nuclear energy reactors should be the order of the day, They are the only clean energy source that has the potential for diminishing the world's reliance on fossil fuels.

Off the Top of My Head

If Two Democratic Senators Were Not Elected in Georgia Run-offs, There Would Be No COVID Relief Package Under Biden

by John Lawrence, March13, 2021

It was crucial that the two Georgia Democratic Senators were elected. Not one Republican voted for Biden's $1.9 trillion bill. If there were one less Democrat in the Senate, nothing like it would ever have been passed. Republicans are the Party of No. Not one Republican Senator will ever vote Yes on any legislation put forward by a Democrat so that Georgia election was crucial. That's why Republican legislatures not only in Georgia but around the country are scrambling to put restrictive Jim Crow voting regulations in place on the belief that Republican operative Paul Weyrich was right. He said, "So many of our Christians have what I call the goo-goo syndrome: good government. They want everybody to vote. I don't want everybody to vote. Elections are not won by a majority of people, they never have been from the beginning of our country and they are not now. As a matter of fact, our leverage in the elections quite candidly goes up as the voting populace goes down."

So now economist Larry Summers is worried about inflation due to the fact that trillions have been added to the deficit. So far, lawmakers have enacted six major bills, costing about $5.3 trillion, to help manage the pandemic and mitigate the economic burden on families and businesses. Even those economists know that the Federal government doesn't need taxes  in order to spend money. The Federal Reserve can create it with a few keystrokes on a computer just the way they did to bail out Wall Street banks during the Great Financial Recession (GFR) of 2008. Of course the public wasn't suppose to know about this "secret" bailout by the Fed. Authorities wanted you to believe that the $700 billion bill passed by Congress provided the bailout. In reality it was much more. Rolling Stone reported: "Washington Post “Fact-checker” columnist Glenn Kessler disputes the numerous studies showing the real bailout outlay was through the Fed, which the Sanders campaign had said was anywhere from $7.7 trillion (the number Bloomberg used in its coverage of secret Fed lending) to $29 trillion (the number the Levy Institute at Bard College calculated, including guarantees and other forms of aid).

So how is it that  Larry Summers was not so worried about inflation due to the Fed's trillions of dollars created and given to Wall Street? The answer is that that money was given to rich people which has caused no inflation because rich people are not going to spend money in ways that drive up the Consumer Price Index (CPI). They are mainly going to invest their money in ways that aren't included in the CPI. They are going to purchase assets like stocks and real estate. Consequence: no inflation at least as measured by the CPI. Instead the Wall Street bailout during the GFR as well as the $2 trillion tax breaks of the Trump administration produced asset inflation. It's the reason that home prices and rents are becoming increasingly unaffordable. But Summers is worried about inflation as measured by the CPI which is what happens when poor and middle class people get a trillion dollar bailout. They will spend that money at least partly on consumer goods that are included in the CPI and potentially drive up prices. However, much of the bailout money will go to pay off debts like past due rent and mortgage payments. This is not inflationary. So the real moral of the story is that, according to economists like Summers, bailing out rich people is good, bailing out poor people is bad.

So two lessons are to be learned here. 1) The Fed doesn't need taxes to create money and spend it into the economy whether that money is to bail out banks or to bail out the poor and middles class. 2) Democrats need to enact at the Federal level voting laws which encourage as many people to vote as possible and roll back Republican enacted restrictions on voting at the state level. In order to do the latter, Democrats will have to eliminate the filibuster at least for particular types of legislation. The only reason Biden's $1.9 trillion relief bill passed is that it was done by a process known as "budget reconciliation" which only requires a majority vote in the Senate. A national voting rights bill cannot be passed by that process and is subject to the filibuster which requires 60 votes. The Party of No wouldn't hesitate to use the filibuster to doom any voting rights legislation at the Federal level which means essentially that Jim Crow voting rights would again be put in place to discourage black people from voting. And don't worry about your children and grandchildren having to pay off the national debt. The Federal Reserve doesn't need their money.

Off the Top of My Head

Green New Deal: We Have a Problem and Its Not Money

by John Lawrence, March 5, 2021

Modern Monetary Theory has shown that a nation with a sovereign currency such as the US dollar need never fear running out of money, and that Federal spending does not depend on tax receipts. However, it does depend on whether the human and material resources are available. Just pouring money on the problem will cause inflation unless it is soaked up by available resources. The problem is that the material resources are not available. As Bill Gates has pointed out in his book, How to Avoid a Climate Disaster, the problem cannot be solved by the renewable energy resources that are now available, namely wind and solar. Building wind turbines requires immense amounts of concrete for the bases and steel for the turbines, and the manufacture of those resources emits tons of greenhouse gasses. Manufacturing solar panels requires mining of quartz sand and coating with ethylene-vinyl acetate. This manufacturing requires energy—most often derived from the burning of fossil fuels, as the Michael Moore film, Planet of the Humans, has pointed out.

Solving the problem of global warming can't be undertaken by using the available resources of concrete, steel and plastic the manufacture of which emits huge amounts of greenhouse gasses. So even though the financial resources are available, the material resources are not. The human resources, however, are arguably available. Wray and Tcherneva  write in a paper How to Pay for the Green New Deal:

"In the neoliberal era, we chronically operate below full employment. That is obvious in Euroland, which is probably operating 25 percent or more below full capacity. Even the US today has substantial excess capacity, in spite of claims that we have achieved full employment. Over the past quarter century, we have had to readjust our estimate for the natural rate of unemployment—the rate below which inflation is supposed to pick up—in every recovery, because inflation never arrives as unemployment falls. Most recently, in the immediate aftermath of the financial crisis, economists claimed that the natural rate of unemployment had increased to over 5 percent. Yet, the unemployment rate kept coming down, while inflation never materialized. We will not know precisely where the inflation barrier is until we ramp up aggregate demand."

So given that human resources are available, it is clear that the material resources are not. Bill Gates recommends spending the money on research to develop new non-greenhouse emitting substitutes for steel, concrete and plastic. That would require high level scientists who might be less available than low level workers. Assuming a full court press requiring large numbers of university and scientific human power, this project is probably feasible although it would not require trillions of dollars of financial resources at least in the initial phases. Later development would require more and finally building out renewable energy resources using these newly developed materials would require more money. So the problem is not that finance is not available. The problem is dispensing it in appropriate amounts over time. There is one promising energy source that would not require such a huge investment in research and development because that has largely been done and that is what we might call digital nuclear. Bill Gates has invested in a company called TerraPower which claims:

"With the growing demand for electricity, TerraPower entered the nuclear energy arena to lift billions out of poverty. Advanced reactors and other isotopic applications are possible with technology and enhanced computing capabilities that were unimaginable just a few decades ago. At TerraPower, we are ready to build the clean energy of tomorrow – today. TerraPower leads in advanced nuclear energy because it has spent the last decade investing in innovative technologies to solve some of the biggest challenges facing humanity."

Two things are clear. Much work has already been done on an advanced nuclear reactor that solves the problems of dangerous explosions such as Chernobyl, Three Mile Island and Fukushima and also the problem of spent fuel radioactive storage. Using high level computing power and advanced digital technology which wasn't available to previous generations of nuclear reactors, Gates maintains that a safe design for nuclear power generation is close to being available. Considering the problems with solar, wind and biofuels which have a longer time horizon before being solved, it seems that nuclear is further along in its development phase and also has greater potential for being a carbon free source of energy. “Nuclear has actually been safer than any other source of [power] generation,” Gates told [CNBC's Andrew] Sorkin. “You know, coal plants, coal particulate, natural gas pipelines blowing up. The deaths per unit of power on these other approaches are — are far higher,” Gates said, a fact he also references in his new book, “How to Avoid a Climate Disaster.”

In their section, “COSTING” THE GREEN NEW DEAL," Wray and Tcherneva write:

"Milton Ezrati, writing for Forbes, offers his own estimates for the various components of the GND, citing different sources (Ezrati 2019). Here we only use his estimates for “greening” projects. Based on estimates by physicist Christopher Clark, the cost of expanding renewable energy to 100 percent would be $2 trillion over 10 years. The smart power grid would cost an additional $400 billion over 10 years (estimate from the Electric Power Institute).13 Upgrading and retrofitting buildings would cost between $2.5 trillion and $3.9 trillion ($3.2 trillion midpoint estimate) over 10 years. The total cost of greening projects comes to $5.6 trillion over 10 years ($560 billion per year, or 2.87 percent of 2017 GDP)."

This is only one of the costing estimates that Wray and Tcherneva provide, but these costing estimates need to be further examined in terms of how much fossil fuels are necessary to build them out and manufacture them. Materials that require large amounts of carbon dioxide emission for their manufacture must be rejected. In the final analysis the Job Guarantee (JG) that Wray and Tcherneva advocate is partially limited to "what Tcherneva calls “care for community” and “care for people” projects: service projects related to senior and youth care, teacher’s helpers, neighborhood and park cleanup, artistic projects, and so on. Thus, the JG program can provide resources needed for green projects in an amount equal to 1 percent of GDP (and resources equal to another 1 percent of GDP for other care services). These would largely be in upgrading buildings and homes to improve energy efficiency, although some could be used in nontechnical maintenance of energy projects (landscape maintenance, for example)." So the mix of high level workers like scientists could be combined with a significant number of low level workers to provide a comprehensive approach."

The bottom line is that we had better get cracking, financing a Green New Deal is no problem because as Modern Monetary Theory has shown, the money is available, but resources must be carefully allocated to avoid the pitfalls of inflation and making the problem worse by using large amounts of traditional materials like concrete, steel and plastics. Nuclear is probably the best bet for power generation and it must be deployed quickly especially in India and China where coal fired power generating plants are still being deployed at a rapid rate.

https://www.youtube.com/watch?v=QwbDETx3zo0

 

Off the Top of My Head

Bill Gates Needs to Get Up To Speed on Modern Monetary Theory

by John Lawrence, February, 28, 2021

Bill Gates is a smart guy. He has singlehandedly been the most influential person on pandemics and now on climate change with his book, How to Avoid a Climate Disaster. In this book the most important thing he points out in my opinion is that it is not enough to put electric cars on the road and to use renewables to power electricity generating plants. There is also much carbon dioxide emission coming from manufacturing and agriculture. In particular the manufacture of cement, steel and plastic produce as much or more carbon dioxide ton for ton as those products themselves. In addition beef and dairy cows produce a lot of methane due to the fact that they are ruminants with a certain kind of digestive system. Gates believes that much innovation, research and development is needed to come up with substitute products in all these areas as well as electrifying everything and running it all with renewables including a new digitized nuclear system.

The one thing that this polymath doesn't seem up to speed on is Modern Monetary Theory (MMT) which is important because all this innovation, research and development requires vast amounts of money. He personally can't provide it all although he has used his fortune in very constructive ways in terms of health care around the world and also seeding promising startups. The Gates Foundation is concerned with all these problems on a world wide basis and not only in the US. He is a globalist and not an America First type of guy which is altogether appropriate because pandemics and particularly global warming are universal problems affecting every country and all people on earth, and their solutions require a world wide approach.

Bill Gates like some economists is somewhat concerned about inflation after all these trillions of dollars are spent by the US government first on COVID relief and then on infrastructure and a Green New Deal. If they study MMT they would know that MMT shares that concern, but addresses it in terms of the amount of idle resources there are in the economy. For instance, if there is 5% unemployment (what is considered full employment by conventional economists), there are still over 15 million people available for work. If there are material resources available such as cement, steel and glass, the price of these items is not likely to be bid up causing inflation. However, while some material resources are readily available, their substitutes which don't cause carbon dioxide emissions in the manufacturing process are not. A large infrastructure project which requires huge amounts of concrete with rebar such as is necessary in constructing a bridge, for example, will also cause large amounts of carbon dioxide to be emitted into the atmosphere. As Gates points out, making things which require cement, steel and plastic adds about 31% of the total of greenhouse gasses which are emitted annually. For every ton of steel produced we emit 1.8 tons of carbon dioxide. For every ton of plastic, the figure is 1.3 tons of carbon dioxide, and for every ton of cement, we emit a ton of carbon dioxide.

With figures like that how is the US going to do a $4 trillion (which is the amount our infrastructure is in deficit) infrastructure project without producing even more billions of tons of greenhouse gasses (GHGs)? We need huge R&D projects funded by the government first before we can scale up the production of carbon free products which replace these traditional construction materials. Financing the R&D is not a problem as these human resources are widely considered to be available. This would cause no inflation. Getting the material resources when little or none of them is available would cause inflation. Nevertheless, the US ramped up production of ships and airplanes for World War II without causing much inflation. To deal with global warming or climate change is a thornier problem. If money is just poured into the economy on a non-targeted basis, it will cause inflation so it makes sense at least initially to pour the money into R&D as Bill Gates suggests. Doing a large infrastructure project without using the proper materials could make global warming even worse.

Off the Top of My Head

How to Throw Republicans for a Loop: Biden Should Propose Tax Breaks for the Middle Class and Tax Increases for the Rich

by John Lawrence, February 25, 2021

The proper use of taxation is to reduce income and wealth inequality. Instead Republicans use tax breaks to primarily benefit the rich. Democrats should modify this playbook. The increasing income and wealth inequality among American citizens cries out for redress. Robin Hood needs to come out and play. There's no law that says tax breaks have to go primarily to the wealthy or be based on some proportionate percentage over all incomes. Democrats should get into the tax break game too. We know that taxes aren't necessary to fund the government. Sure they're part of it, but the government can spend whatever Congress authorizes regardless of whether or not there is money from taxes to pay for it. The shortfall is made up with Treasury bonds most of which end up on the balance sheet of the Federal Reserve just like the Fed used Quantitative Easing (QE), a fancy name that signified that the Fed issued trillions of dollars to bail out the Wall Street banks in 2008. In that case the Fed took MBSs (Mortgage Backed Securities), most of which were worthless onto its balance sheet as "collateral." The Fed can lend money to any entity it likes as long as it takes collateral onto its balance sheet. Much of this collateral is worthless such as defunct MBSs and even old bicycles!

In the article, "Modern Monetary Theory and the Changing Role of Tax in Society," by Andrew Baker and Richard Murphy, published online by Cambridge University Press we find the following:

"Tax is traditionally viewed as the main funding mechanism for government spending. Consequently, social policy is often seen as something determined and constrained by tax revenue. Modern Monetary Theory (‘MMT’) presents a reversal of the tax-spend cycle, by identifying a spend-tax cycle. Using the UK as an example, we highlight that one of MMT’s most important, but under-explored, contributions is its potential to re-frame the role of tax from both a macroeconomic and social policy perspective. We use insights on the money removal, or cancellation function of taxes, derived from MMT, to demonstrate how this also creates possibilities for using tax to achieve social objectives such as mitigating income and wealth inequality, increasing access to housing, or funding a Green New Deal. For social policy researchers the challenge arising is to use these insights to re-engineer tax systems and redesign social tax expenditures (STEs) for creative social policy purposes."

MMT is a game changer. Conventional thinking is that government can only spend money collected from taxes. But that is not how the system really works. As a sovereign currency, the Fed can just create US dollars with a few keystrokes on a computer. The budget deficit and national debt just become accounting entries on the Fed's balance sheet. We are not mortgaging our children's and grandchildren's future. This is money that never needs to be paid back, that our children never need to pay back. China is not holding this debt over our heads; China could be paid back tomorrow if need be. The US government operates on a different set of principles than the US states, European countries in the Euro zone, and households. All these entities do need to pay back loans. The US government does not because it can just create or issue the money which is how the Fed operates on a daily basis. Even local banks create money when a loan is taken out without the need for deposits. They just have to have collateral - usually 10% of deposits - in their reserve account at the Fed. So money can just be created by the Federal Reserve, but, obviously, it does not do so willy nilly. Like alcohol, this facility must be used responsibly. So that is what the debate should be about, not the size of the deficit or the national debt.

The national debt was a problem when the US dollar was on a gold standard. The US promised to redeem dollars - paper currency - for gold up until 1971. Obviously, there was not enough gold if, all of a sudden, China, let's say, wanted to take all its US dollars and demand gold at $35 an ounce. But in 1971 President Nixon took the US off the gold standard. He said the US would forevermore not redeem US currency for gold. At that point the US dollar became a "fiat" currency. That means that a dollar was worth a dollar just because the US government said it was. The US dollar did not become immediately worthless. People continued to use it, and it continued to retain its value vis a vis other currencies. In fact it's the world's reserve currency as Nixon made a deal with the Saudis only to accept payment for oil in US dollars. That alone meant that the other countries of the world needed US dollars if for no other reason than to buy oil. As a matter of fact today most business dealings of foreign countries are settled in US dollars. So the US dollar has a bright future at least for now.

The conclusion is that US households, businesses, US states and European nations that use the Euro need to pay back loans when they borrow money. A nation with a sovereign currency such as the US, the UK, Japan, China and others creates its money when its central bank issues it by means of keystrokes. No one can demand repayment or exchange of dollars for gold or anything else. If China wants to be paid back for the Treasury bonds it holds, the money in its Treasuries (savings) account at the Fed will be debited and credited to its checking account at the Fed. It's as simple as that. That money can be exchanged for Chinese currency on the open market at the prevailing exchange rate. But probably the Chinese would want to keep much of their financial assets in dollars rather than renminbi since their currency is pegged to the dollar and many of their business dealings are settled in dollars.

Off the Top of My Head

Why Should Blue Collar Workers Have to Pay Taxes to Bail Out White Collar Student Loan Debt?

by John Lawrence

Short answer: There is no need for the Federal government to tax in order to spend. That has been demonstrated by Modern Monetary Theory. However, taxation, if imposed in order to fight inflation, needs to be imposed primarily on the rich and upper middle class, not on the poor or lower middle class. The smart thing for the Biden administration to do would be to decrease taxes on the lower middle class ^i.e. blue collar workers before 2022 thus drawing them away from the Trump camp. In general the American people need to be educated that deficits don't matter except just as accounting entries on the Fed's balance sheet. Biden's COVID relief initiative of $1.9 billion will not raise taxes nor will his follow-on trillion dollar initiative for the build-out of green infrastructure.

The question, "Can We Afford to Pay for the Green New Deal?" is equivalent to the question "Can We Afford to Pay the Costs of Avoiding Annihilation?". In the past we have been able to afford a massive build-up to pay for the Second World War. The climate challenge is the moral equivalent of war. If we lose this war we lose not just our freedom. We lose the habitability of the entire planet. Various attempts have been made to cost out the components of a Green New Deal. Green power generation and transportation are not sufficient in themselves to get to net zero carbon emission, but they are a start. As Bill Gates has pointed out in his recent book, How to Avoid a Climate Disaster, major industrial processes also generate much greenhouse gas emission. For instance, every ton of cement that is produced contributes one ton of carbon dioxide which goes into the atmosphere. Every ton of steel produced results in 1.8 tons of carbon dioxide emitted into the atmosphere, and every ton of plastics produced emits 1.3 tons of carbon dioxide. So it's not enough just to deal with green transportation (electric vehicles) and green power generation (solar and wind).

The cost of "greening" these industrial processes is pretty steep. Capturing carbon dioxide at the site of the manufacturing process is possible, but there is no cheap way to do it. Bill Gates is investing in promising start-ups and is counting on innovation to come up with new processes and materials which will not result in so much carbon dioxide being released into the air. Gates points out that we need to electrify every possible manufacturing process and make sure that all that electricity is generated cleanly. He advocates a new generation of nuclear power sources as wind and solar can not possible fill every energy need mainly because they are intermittent. Nuclear can fill the gap for consistent power generation when solar and/or wind are offline. Smart nuclear power which Bill Gates has been instrumental in developing would solve the problems encountered so far of explosion and what to do with nuclear waste. As a last resort Direct Air Capture of carbon dioxide from the air is possible but also costly.

What it all boils down to is this: we will need on the order of a trillion dollars a year for 10 years commitment to address climate change if we have a prayer for avoiding the worst consequences. What's more a lot of this commitment must be made in cooperation with China which is one of the worst polluters. Rivalry and even a Cold War must be set aside if the world is to avoid the worst outcome from global warming. India and China are building coal fired power generation plants at a rapid pace because coal fired power plants are so cheap comparatively and those countries are developing so quickly. It's not enough just to "green" the US. It has to be cooperation on a world wide basis. Competition has to be set aside and replaced by cooperation. The ownership of intellectual property is irrelevant when it comes to saving the planet.

A national budget for a Green New Deal shouldn't contribute to inflation since there are currently so many unemployed people available for work, and particularly because so many of the small businesses that were lost during the pandemic are not coming back. Also further robotizing of manufacturing processes will eliminate whatever blue collar workers are left working in those fields. In World War II there was some postponement of consumption in order to fight inflation. That may be necessary for the moral equivalent of war which the Green New Deal represents. If so, workers in certain nonessential industries may have to be repurposed and retrained for industries involved in combating climate change.

Off the Top of My Head

Former Energy Secretary Proposes Going to Capital Markets for Money to Upgrade Energy Grid Infrastructure: Is This Wise?

by John Lawrence, February 21, 2021

Clinton's Energy Secretary, Bill Richardson, proposes going to the capital markets since the government has been spending so much money on COVID relief. He suggests a public-private partnership. Evidently, Mr. Richardson, like most politicians and dignitaries, is totally ignorant of Modern Monetary Theory. The Federal Reserve can create interest free money with a few computer keystrokes while the capital markets will charge interest, and not only that. Once you enter the Wall Street casino you're subject to all the vagaries of the financial markets like securitzation, credit default obligations, interest rate swaps, betting against the success of various programs and much more. These are the kind of financial activities that caused the 2008 Great Recession and the bankruptcy of Orange County, Birmingham, Milan Italy and the misery in Greece. What's more going to the capital markets causes the same inflation risks as having the Fed create the money because inflation is caused by the amount of money sloshing around in the economy not who supplies it.

Larry Summers is worried about Biden's big spending bills causing inflation. What he doesn't get is that these bills are targeted. It's not just money pumped into the economy. The money going to states and municipalities, for example, is going to pay off debts. That holds for all the money going to families who are behind on their rents and mortgages. Paying off debts is deflationary not inflationary. Money going to unemployment insurance is just money that allows people to consume as if they had a job. That is not inflationary. Money going to businesses to prevent them from failing and putting employees back to work is not inflationary because having these businesses fail and employees without jobs is deflationary. All those flights and cruises not taken, all the money not spent going to movie theaters, all the money not spent on consumption when consumption is 70% of the economy - is deflationary. In fact there is so much deflation during a recession that that is the main worry - not inflation.

But reorienting priorities should also play a part in controlling inflation. Decreasing the trillion dollar budget of the military and military-industrial complex would help to offset inflation and pay for infrastructure repair. It would also free up the human resources needed for a build out of green infrastructure because wage inflation is caused by not enough human resources being available thus bidding up wages. The integrity of the US dollar could also be increased by eliminating sanctions on other countries. The US is using the fact of sanctioning other countries because the US dollar is the world's reserve currency causing the diminution of the use of the US currency as sanctioned countries find workarounds using other currencies. In America's Other Forever War, Peter Beinart explains that these sanctions do not accomplish anything except to hurt the people that happen to be living in the countries that are sanctioned. The chickens will come home to roost as the US dollar looses value in the international currency markets as the euro, yen and reminbi are used more for international trade. As Beinart writes, "“It is past time,” Joe Biden pledged last year, “to end the forever wars.” He’s right. But his definition of war is too narrow."

A careful analysis of Biden's spending plans  as well as reorienting current spending priorities needs to be carried out so that runaway inflation does not occur. Certainly putting people back to work is not inflationary. Federal money targeted toward paying off debts by states, municipalities and families is not inflationary. Federal money spent on infrastructure is not inflationary providing that the human and material resources are available. Since the Federal Reserve can create US dollars without the need for taxes, Modern Monetary Theory has shown and economists widely agree that the only limit on Federal so-called "deficit" spending is inflation. Stephanie Kelton has explained that Deficits Don't Matter in her book, The Deficit Myth. People like Bill Richardson and most liberal and conservative politicians need to study up on economics. Bernie Sanders and Alexandria Ocasio-Cortez are some of the few people that already have.

Off the Top of My Head

How to Pay for a Green New Deal

by John Lawrence

In 1940 British economist J. M. Keynes’s book, How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer gave the economic guidance for financing the Second World War. Following Keynes, massive financial resources were devoted to the war resulting in full employment without inflation. There is a model here that can be used for the Green New Deal (GND) which is the Moral Equivalent Of War (MEOW). Bill Gates and J.D. Alt have put an upper bound of $5 trillion a year, but closer and more exacting estimates have put it at $1 trillion a year for 10 years. Yeva Nersisyan and L. Randall Wray write: "Instead of simply adding up estimates of the government spending that would be required, we assess resource availability that can be devoted to implementing GND projects. This includes mobilizing unutilized and underutilized resources, as well as shifting resources from current destructive and inefficient uses to GND projects. We argue that financial affordability cannot be an issue for the sovereign US government. Rather, the problem will be inflation if sufficient resources cannot be diverted to the GND. And if inflation is likely, we need to put in place anti-inflationary measures, such as well-targeted taxes, wage and price controls, rationing, and voluntary saving. Following Keynes, we recommend deferred consumption as our first choice should inflation pressures arise. We conclude that it is likely that the GND can be phased in without inflation, but if price pressures  do appear, deferring a small amount of consumption will be sufficient to attenuate them."

Their analysis is the most astute to date. We know that the money is available because the Federal Reserve can create it with a few keystrokes on a computer. This has been demonstrated time and time again from the bank bailouts of the Great Recession to the COVID relief bills. Modern Monetary Theory (MMT) has provided the theoretical framework that explains how the Fed creates money and the fact that the US can never run out of money. The US government which has a sovereign currency does not have to pay back loans whereas a private household or even a US state does have to pay back loans or else suffer the consequences. The only potential consequence when the Fed creates money for public purposes is inflation which can be controlled by a variety of measures. In How to Pay for the Green New Deal, the authors write: "Viewed from the MMT perspective, the government uses the monetary system to mobilize real resources and to move some of them to pursuit of the public purpose. Affordability is never an important question for a sovereign government—the relevant question concerns resource availability and suitability. There is thus a natural alliance between MMT and the GND. If we can identify technologically feasible projects that would achieve the GND’s goals, and if we can identify the resources to devote to these projects, then we can arrange for the financing of the programs." Bill Gates has identified a number of promising new technologies that he has invested in to address the GND issue.

As Keynes pointed out, it's a question of available resources to tackle any public problem. If the resources are available, the money is no problem although resources may need to be switched from the private to the public sector. Republicans who favor that all economic activity be confined to the private sector may have a problem with this. Nevertheless, this is exactly what happened during the Second World War. Resources, both human and material, were activated within the public sector to fight the war while at the same time were withdrawn from the private sector. Consumption was held to a minimum and deferred till the war's end. Then private resources, both human, financial and material, were unleashed so that the post war era was one of the most prosperous that the world has ever seen. The deflation brought about by wage and price controls and rationing during the war offset the inflation caused by the public money that was spent financing the war. The same tactic is necessary for a Green New Deal.

Yeva Nersisyan and L. Randall Wray write: "The approach is simple but also profound: total the resources available to prosecute the war while meeting the consumption needs of the population. If the available resources fall short of what is needed, the solution cannot be found in the finances. Government can always spend more to shift resources to the war effort; if consumption spending is not reduced, the result is inflation that generates a combination of “voluntary” saving and excess profits as real consumption falls. To prevent this undesirable outcome, government must reduce consumption demand by some combination of voluntary saving, taxes, deferred compensation, rationing, and wage and price controls. To be clear, the purpose of these actions is not to provide government with the financial means to “pay for” the war effort but rather to relieve pressure on scarce resources."

There will be much opposition from the America First crowd which is really a euphemism for Me First. The people who put their own freedom to do whatever they want whenever they want will probably not take too kindly to making any sacrifices so that future generations will have a habitable planet to live on. There will be demagogues ala Trump who will appeal to their baser instincts of solipsistic selfishness. They will be all about their First Amendment freedoms to resist any effort that is for the public good especially if it involves doing anything of a salutary nature for people in other parts of the world. I can visualize bars and restaurants complaining that they can't get enough hired help because everyone is employed by the Green New Deal. Let's hope that the better angels of mankind will prevail.

Off the Top of My Head

Despite All the Talk, Practically Nothing Has Been Done About Global Warming

by John Lawrence

Every year 51 billion tons of Greenhouse Gasses (GHGs) go into the atmosphere. There has been no decrease in that number despite the Paris Accords, despite more hybrid cars, despite the build up of solar and wind renewables. 197 countries adopted the Paris Agreement at the COP21 in Paris on 12 December 2015, over 5 years ago and yet there has been no improvement in the number of tons of GHGs dumped into the atmosphere per year. Well, a couple of tons less this year due to the pandemic. In general it is slightly increasing according to Bill Gates in his new book, "How to Avoid a Climate Disaster." At the rate we are going, there is no way that the earth can escape the dire consequences of global warming. Should we just give up and enjoy the few remaining years of a habitable earth? I don't think so. What will it take to forestall catastrophe? Basically, it will take a Green New Deal or should we call it the Green Equivalent of World War II?

During World War II there was a huge amount of government deficit spending. Modern Monetary Theory has shown that this is no problem because a government such as the US which issues its own sovereign currency can never run out of money whether or not there are tax receipts to cover the spending. The problem is inflation which occurred in WW I despite more modest outlays. In the WW II years there were wage and price controls which effectively controlled inflation. There was also rationing. These measures made sure that all resources both human and material were devoted to the war effort. Everyone was on the same page. Is that possible for a Moral Equivalent of War (MEOW) today? Would people be willing to give up anything so that resources could be devoted to a MEOW as far as Global Warming is concerned? Many Americans are not even willing to wear a mask during a pandemic, and many also believe that global warming is a hoax. Would they sacrifice for a MEOW?

Bill Gates has invested his money in a variety of start-ups which have some promise of addressing the global warming issue. One of them is Direct Air Capture (DAC) in which carbon dioxide is removed directly out of the air. This is a feasible alternative which is already in use on a small scale. The problem is that it's the most expensive alternative out there. A combination of other methods to ameliorate GHGs in the atmosphere would not only be more feasible but cheaper. He estimates that removing 51 billion tons of GHGs per year would cost $5.1 trillion per year. This would be an upper bound on the cost of getting to zero GHG emissions. Actually this does not seem too unreasonable given the fact that between 2008 and 2015, the Fed’s balance sheet, its total assets, ballooned from $900 billion to $4.5 trillion. That means that the Fed "printed" $3.4 trillion with its Quantitative Easing (QE) program. The Fed has "printed" $3.5 trillion just in the year 2020 in response to the coronavirus pandemic to keep the economy from falling apart. This is the amount of money authorized by Congress in several spending bills. Add to that Joe Biden's $1.9 trillion COVID relief bill and you get a total of $5.4 trillion. And yet there has been no inflation.

So there is a little hocus pocus going on in the relationship between the Fed and the Treasury. The Fed by law is not allowed to buy US debt directly from the Treasury department. How it works is Congress authorizes a spending bill. The Treasury issues a Treasury bond if there aren't enough taxes to cover it. That bond is sold to the "primary dealers" which are mainly big Wall Street banks, and then the Fed buys the bond on the "open market" which means it buys them from the primary dealers. So by a roundabout method, the Fed buys up US debt by means of "printing" money although it's actually by means of a few keystrokes on a computer crediting the Treasury's account at the Fed and the Fed takes the bonds onto its balance sheet from which theoretically it could sell them some day. One little distinction: this is not QE. QE was a term coined when the Fed "printed" money to bail out the big banks aka providing liquidity. The Fed took all the toxic junk of mortgage backed securities and other assets onto its balance sheet and gave the banks all the money they needed to cover bets on credit default obligations and interest rate swaps and other casino garbage. So while it amounts to the same thing - the Fed "printing" money and adding it into the economy - the money injected now is going into the real economy whereas the QE went into the Wall Street economy.

But I digress. So Bill Gates says it would require at most $5.1 trillion to get our GHGs down to zero on an annual basis. In other words keep the goddam fossil fuels, cow farts and Keystone pipeline and just get those DAC machines humming. Seems reasonable to me. The Fed can just print up that $5.1 trillion and we're home clear. J.D. Alt estimates that solving the global warming crisis will cost $60 trillion over 10 years which is about the same amount per year that Bill Gates estimates although supposedly we will reach some point at which renewables and other technologies will result in zero emissions so we will not have to go on spending that amount in perpetuity. So why don't we just go ahead and do it? The Fed could just print the money. No inflation is in sight. Modern Monetary Theory has shown that any country with a sovereign currency (such as the US dollar) can never run out of money and as long as the resources are available (both human and material) the financial resources will always be available. The only problem is the stupidity of most of the US Congress (mainly Republicans) whose only response to any Democratic initiative is just to Just Say No as well as their economic ignorance. So it is of paramount importance that next year after the pandemic is over and before Republicans take over (hope not) one of the branches of Congress in 2022, that Congress passes a $5 trillion per year Green New Deal or a $50 trillion GND spread over 10 years.

Off the Top of My Head

The Two Strands of Modern Economic Theory

by John Lawrence, February 12, 2021

Ellen Brown with her book Web of Debt pointed out that public banks could save states and municipalities millions in interest compared to Wall Street banks. She also pointed out that money is created by banks when they make loans with fractional reserve banking. They just create the money with keystrokes; it doesn't come out of deposits. Ergo, all money comes from debt, but that's only half the story. The other strand explains how the Federal Reserve just creates money by keystrokes. In The Deficit Myth, Stephanie Kelton explains how countries with sovereign currencies can create money that really is not debt, despite the fact that conventional thinking says it is. When households or states or countries in the Euro zone take on debt, they do have to pay it back. When countries with sovereign currencies create money, they don't have to pay it back. It's as simple as that.

When European countries gave up their sovereign currencies and adopted the Euro, they gave up the right to create the money they needed to pay bills so they need to borrow on capital markets which can charge them whatever interest they want. This is how Greece and Italy and other European countries got into problems. On the other hand the U.K. which never gave up its sovereign currency can just create the money it needs without going to the debt markets. In the same way Orange County and other US municipalities got into trouble with spiraling debt which had to be paid back. This can get out of hand because the more indebted a debtor gets, the higher interest rate they get charged so that in the worst case they are just borrowing money to pay interest. The US can never get in this debt trap because it never has to borrow money on the open market and the Fed can set interest rates however it wants. Once authorized by Congress and required by law Treasury bonds are issued and can always be paid because the Fed can just create the money to pay them.

Modern Monetary Theory (MMT) has established that deficit spending, whether that comes from tax breaks or government programs or currently for coronavirus relief, is just an accounting entry on the Fed's balance sheet. The national debt never needs to be paid off. Also any country that owns Treasuries - for instance, China - could have them paid off tomorrow if they chose to cash them all in by the Fed just debiting money from the savings account of the People's Bank of China at the Fed and crediting their cash account also at the Fed. Countries with sovereign currencies, ^i.e. the US dollar, the British pound, the Japanese yen etc, can all create money in this way by having their central banks do it with keystrokes on a computer. Greece, Italy, California and New York can't do this because they don't have sovereign currencies.

So there is a difference between debt acquired by households, firms and countries which don't issue their own sovereign currency and countries which have central banks that do. The US Federal Reserve can buy up Treasury bonds as necessary to provide as much money as is authorized by Congress to the US Treasury. By law they can't buy them directly from the Treasury but must buy them on the open market. However, US primary dealers - mainly Wall Street banks - are required to buy them and the Fed can buy them from the primary dealers by providing "liquidity" - dollars which the Fed creates with keystrokes - to the Wall Street banks. The Fed also controls interest rates which at this time are 0.25% or almost zero. So the $1.9 trillion relief package proposed by Biden is no problem either for the US Treasury or the Fed. That money could just end up on the Fed's balance sheet the way the trillions of dollars it created to bail out the Big Banks in the Great Financial Crisis of 2008 did. The fact is that, when the US government deficit spends, that adds money to the private economy, and right now the private economy is hurting because so many are out of work and not able to pay rent or mortgages or car payments. Money added to the economy by deficit spending (deficit being really a misnomer) can be readily absorbed by unemployed workers to pay their bills. The point is that taxes are not necessary for government spending.

So Web of Debt applies to the private economy and The Deficit Myth applies to the national economy. The first book advocates public banking which can save states and municipalities money on interest because they do have to pay their debts. The second book describes how governments with sovereign currencies can just create money which need never be paid off. However, this money creation facility should, like alcohol, be used responsibly; otherwise, inflation can occur. But when huge numbers of people are unemployed and states are having a hard time paying their bills, it is incumbent on the central government to help them. The same applies to European countries in the Euro zone. US lawmakers need to get up to date on how the real economy actually works. In truth Republicans have lost all legitimacy when it comes to their harping on deficit spending.

Off the Top of My Head

Even With Unlimited Spending Some Problems Can't Be Solved

by John Lawrence

Modern Monetary Theory (MMT) has shown that unlimited Federal spending is no problem. The money is there, but it's a question if the productive capacity is there. For instance, since most products are manufactured in China, unlimited spending on products needed to counter the pandemic might only produce inflation. That's a problem of letting crucial industries be relocated to a foreign country and not manufactured here. If you can't ramp up production in a meaningful time frame, even though the finance is not a problem, the ability to produce needed products may be. In this situation MMT predicts inflation. Existing facilities to produce vaccines can only produce so many vials.You could go to 24 hour a day production, but beyond that you would have to build more factories and that takes time. Would the money spent to build more factories be well spent if the production facilities came online only after the crisis was over? No. MMT stands for spending money wisely to solve social problems like the pandemic and global warming, but the time frame within which the problems need to be solved is important. There's no sense in spending money to ramp up production if that production only is available after the problem has already been solved.

Yeva Nersisyan and L Randall Wray write:

"But what happens when ventilators and masks are not available for sale even as companies are operating 24/7? More money may not solve the problem, but the government still has a role to play. During the second world war, the US quickly became “the arsenal of democracy” by repurposing its productive capacity to meet the needs of the war. Through diligent planning “[l]ipstick cases became bomb cases, beer cans went to hand grenades, adding machines to automatic pistols, and vacuum cleaners to gas mask parts”. We were able to cut “production time for Liberty Ships down from 365 days to 92, 62, and, finally, to one day”. We can mobilize our resources once again to build temporary hospitals, and to ensure a sufficient supply of medical equipment and whatever else is necessary to overcome the crisis."

So it may be necessary to shift production from pre-COVID endeavors to provide the necessary human and material resources to deal with the problem. For instance, the restaurant industry which filled the gap from lack of time for home preparation of meals due to both spouses working has suffered the most during the pandemic because more people have the time for meal preparation at home. Those workers are now available for deployment in other more crucial industries such as the renewable energy industry. Other hospitality and entertainment sector workers can also be shifted to more crucial endeavors just as they were during World War II. The economy as it existed pre-COVID was composed mainly of profitable private sector activities, many of which were not designed to deal with the most crucial social problems.

The solution of the pandemic at least in the US has an expected solution within the next year. Global warming has a somewhat longer time frame, but requires much more money to be spent because, from a finance point of view, it's a much larger problem. Changing the infrastructure of the whole world will require much more money but over a longer time span. The time span for solving global warming is approximately 10 years so we have ten times as long to solve global warming as we do to solve the pandemic. The pandemic may never be completely resolved because wiping out the virus everywhere in the world completely may not be possible just as it has not been possible to wipe out a number of other viruses. Over time, however, the problem can become treatable and manageable. The same can be said of the global warming problem. It may be impossible to eliminate every source of greenhouse gas emission in 10 years, but if most of them are eliminated, the remaining problems may be manageable in the sense that the earth may ultimately be salvageable.

What we have learned from the pandemic is that much more money needs to be spent on research and development in virology so that we are better prepared to deal with pandemics and epidemics. Two infectious diseases have successfully been eradicated: smallpox and rinderpest. The rest still exist somewhere in the world. There are also four ongoing programs, targeting poliomyelitis, yaws, dracunculiasis, and malaria. Five more infectious diseases have been identified as of April 2008 as potentially eradicable with current technology by the Carter Center International Task Force for Disease Eradication—measles, mumps, rubella, lymphatic filariasis and cysticercosis. What we have also learned is that there is more of a threat to Americans and human beings in general from viruses than there is from foreign nations, both state actors and terrorists. Therefore, the money spent on the defense department should be drastically reduced while the money spent on human health should be vastly increased. Let's deal with the real threats not the imagined ones.

Coronavirus Has Destroyed the Myth of the Deficit

by Yeva Nersisyan and L Randall Wray

from the Guardian, April 17, 2020

No, federal government spending doesn’t have to be ‘paid for’. The crisis shows providing for our society is not a financial issue

‘Buying into the deficit myth, for generations we have been living below our means – paralyzed by the belief that finance is the constraint.’ Photograph: Evan Vucci/AP

Only a month ago, a stimulus bill of $2tn would have been unthinkable. Indignant deficit scolds would have asked how one planned to pay for it, and complained about burdening our grandchildren with debt and bankrupting our country. Bernie Sanders bent over backwards to explain how he was going to pay for a Green New Deal or Medicare for All. These programs don’t seem as expensive any more. Suddenly the government is planning “helicopter drops” of cash. Larry Kudlow, who relentlessly attacked the Obama stimulus during the global financial crisis, is touting the current stimulus as “the single largest Main Street assistance program in the history of the United States”.

Nobody is seriously asking how we are going to pay for this stimulus – and they shouldn’t. It took a global pandemic to explode the myth that federal government spending has to be “paid for”. The Covid-19 crisis has clearly demonstrated what should have been obvious already: provisioning society – whether with food, disinfecting wipes, toilet paper or medical supplies – is not a financial issue. If we can’t produce enough masks, ventilators or food, finance will not help. Society’s capacity to produce real output is what limits its ability to provision itself. And this is precisely what the virus threatens, as workers stay home, supply chains break down and businesses shut their doors.

On the financial side, a sovereign government can always afford to buy what is for sale in its currency, as Modern Money Theorists have long explained. It cannot run out of money because it simply credits bank accounts when it spends. This is not a prescription, but merely a description of what actually happens. In the United States, Congress passes the budget, while the Treasury, in cooperation with its fiscal agent, the Federal Reserve, makes the necessary payments. This happens through the thick and thin of the business cycle, crisis or not. If the US government wants to buy more ventilators or masks, finance cannot be an impediment.

But what happens when ventilators and masks are not available for sale even as companies are operating 24/7? More money may not solve the problem, but the government still has a role to play. During the second world war, the US quickly became “the arsenal of democracy” by repurposing its productive capacity to meet the needs of the war. Through diligent planning “[l]ipstick cases became bomb cases, beer cans went to hand grenades, adding machines to automatic pistols, and vacuum cleaners to gas mask parts”. We were able to cut “production time for Liberty Ships down from 365 days to 92, 62, and, finally, to one day”. We can mobilize our resources once again to build temporary hospitals, and to ensure a sufficient supply of medical equipment and whatever else is necessary to overcome the crisis.

Buying into the deficit myth, for generations we have been living below our means – paralyzed by the belief that finance is the constraint. Prolonged periods of slack and jobless recoveries have disincentivized investment and hurt our productive capacity and labor productivity. Even in good times our economy leaves millions unemployed or underemployed and a significant amount of our capacity idle (before the epidemic, our factories were only operating at three-quarters of capacity). We have underinvested in public healthcare, education and infrastructure and imposed extreme limitations on social assistance programs. As of this writing, the administration still plans to go through with its plan to kick 700,000 Americans off the food stamps program to save a measly $4.2bn over five years. We have been living in “poverty in the midst of plenty”, as John Maynard Keynes aptly noted in the Great Depression.

Once this crisis passes, the deficit scolds will be back at it again, trying to put roadblocks in front of progressive policies. We will be told we can’t afford Medicare for All, Jobs for All, College for All or halting climate change. The centrists will try to get us back to “normal” – ie an economy that leaves so many behind.

It is imperative that we resist. What progressives need to push for is creating a different kind of economy through a Green New Deal. To do so, we need to distinguish between the myths and real constraints, understanding “that what is technically feasible is financially possible” for a sovereign government. Affording the Green New Deal is about real resources and technology, not about finance.

The original New Deal was also dogged by concerns about excessive government spending. The second world war eliminated that obstacle, unleashing extraordinary economic mobilization and decades of prosperity. Hopefully the coronavirus crisis will not be as destructive as the Great Depression, but if there is one thing it should destroy, it’s the myth of the deficit.

• Yeva Nersisyan is associate professor of economics at Franklin and Marshall College

• L Randall Wray, author of Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems; Why Minsky Matters: An Introduction to the Work of a Maverick Economist; and Understanding Modern Money: The Key to Full Employment and Price Stability, is senior scholar at the Levy Economics Institute and professor of economics at Bard College

 

Off the Top of My Head

Contrary to Larry Summers Biden's Relief Bill Will Not Cause Increased Inflation

by John Lawrence, February 8, 2021

Joe Biden's almost $2 trillion pandemic relief deal will not be inflationary despite Larry Summers' opinion. Inflation occurs when there is too much money sloshing around in the economy chasing too few goods, services and human resources. That is not the case here. First of all it will reemploy the unemployed. This is a presently unused resource. Secondly, it will suck up unused or unsold goods and services funding things that are currently unfunded like child care, and thirdly, it will serve to pay off debt and replenish savings. Any money going into savings or paying off debt is not inflationary. It's deflationary in the sense that the banks will lose money due to interest they won't collect if loans are paid off. The middle class that did have savings or credit in many cases has had to use those to survive the pandemic. That's why giving money to higher earning, but not wealthy, families is a good thing. To hear some people talk only money should be given to those who are desperate and living from paycheck to paycheck. Yes, those are the families most in need who should be given money first, but higher earning families who have depleted their savings or gone into debt need to be resuscitated also.

So here is what Larry Summers says about inflation:

"First, while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply."

Summers fails to take into account the deflationary effects of the relief bill. Money going to states and municipalities will actually be deflationary because much of it will be used to pay down debts and loans. Many state budgets are in horrible shape and employees such as police, librarians and firemen have been laid off. People paying back rents and mortgages will have a deflationary effect on the economy. People on the lower end of the economic spectrum who are living paycheck to paycheck will be able to get a little ahead and also save. This will not add a lot to inflation. Also money can always be withdrawn from the economy by taxing the rich, those who actually added to their wealth and income during the pandemic. This is the only reason that taxes might need to be raised because the US government has the ability to spend without raising taxes. The only reason to tax would be to fight inflation and those taxes can be targeted towards wealthier families and individuals. The Federal Reserve has not been able to achieve its target rate of 2% inflation recently despite maintaining almost zero percent interest rates. It wants more money sloshing around in the economy.

There are other ways to suck money out of the economy to offset inflation. Modern Monetary Theory (MMT) recommends Medicare for All which would result in much less money spent on health care while providing better health outcomes. This would be deflationary which would counteract any inflationary propensities of government deficit spending. Conventional economic thinking is that there is a tradeoff between unemployment and inflation. The more people unemployed there are, the more inflation is diminished. Therefore, full employment as defined by economists is not really employment where everyone is employed. It is that level of unemployment which just keeps inflation in check. However, according to "The Trade-off between Inflation and Unemployment in an MMT World: An Open Economy Perspective" by Emilio Carnevali and Matteo Deleidi, MMT it is contended that inflation "occurs when the system reaches the point of full utilization of its productive capacity, both in terms of capital utilization and in terms of availability of workers. At this point, the government should curb inflation forces cooling down the effective demand. This is another fundamental task of taxes." As long as there is unused capacity in human or production terms, increased employment will not be inflationary. So Larry summers need not worry that putting all those unemployed people back to work will lead to inflation.

Biden's putting a $15.00 an hour minimum wage in the relief bill is also what MMT advocates in relation to a Federal job guarantee. Real full employment at a minimum wage of $15.00 an hour does not need to be inflationary especially if it is in areas that don't compete with already employed workers. Biden's relief bill will have the effect of putting almost everyone to work with at least an hourly pay of $15.00 an hour. People who are living paycheck to paycheck and employed at $15.00 an hour are not going to contribute to inflation since their demands on the economy are those that can be easily accommodated by existing production and easily increased production. Deficit spending is not a problem. Former Chair of the Federal Reserve Alan Greenspan said, "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." So the real limit on government spending is inflation which can be controlled by taxes on those sectors of the economy which are not easily upscaled to provide more supply.

There is much unused capacity in the current US economy both in human and material or physical terms. People should be put back to work with a minimum wage of $15.00 per hour. A follow-on bill that would address infrastructure rebuilding and a Green New Deal also needs to be done. Resources may have to be managed by government to control inflation, but the important thing is that work needs to be done in these areas and people need to be put back to work. Inflation can also be offset by the deflationary effect of withdrawing funds form a bloated defense sector.

Off the Top of My Head

The Left/Right Political Spectrum Is Irrelevant at This Point

by John Lawrence

The Extreme Right position on the pandemic is just to let it rip. This would mean ongoing disaster for the whole world into the indefinite future. The Extreme Left would advocate government spending as much money as necessary to defeat the pandemic and get the economy back to normal. The middle of the road would advocate doing half as much as necessary to sort of but not really get the pandemic under control. Result: the coronavirus would be mutating and popping back up for years just as SARS COVID-9 is a mutation of the original SARS virus and is related to the MERS virus. Whether the mutations occur in animals or in humans, it doesn't matter. Viruses mutate and doing a half ass job in getting rid of this pandemic which is the political "middle" insures that there will be more pandemics in the future. Not allocating increased funding for the study and research of viruses insures that there will be more threats to human lives and economies.

The Extreme Right position on global warming is to do nothing about it. That includes encouraging consumption of fossil fuels and not caring how many greenhouse gasses are emitted into the atmosphere. This virtually guarantees that the earth will become uninhabitable in 50 years or less. The Extreme Left position would be to do as much government spending as necessary to reduce greenhouse gas emissions to zero in about 10 years. This would prevent global temperatures from rising more than the amount that would destroy the habitability of the earth. The middle position would be to spend a piddling amount to combat global warming. The result would be that the earth would become uninhabitable in a slightly longer time frame.

Republicans want to limit Federal government expenditures to solve problems while maximizing the private sector in the economy. Problem is that dealing with the pandemic and climate change are problems private enterprise is not capable of solving or even leading the way. Is there a role for private enterprise? Certainly, but government must play the leading role or these major problems as well as a number of others will not be solved. Private enterprise won't engage in any activity for which there are no profits to be made. Some problems like the pandemic and global warming are not likely to yield much in the way of profits. Ergo, private enterprise will not be interested in dealing with them.

The COVID relief package that Biden has put forward is totally dependent on Democrats controlling both Houses of Congress. That in turn was totally dependent on the Georgia runoff elections for two Senators which produced two Democrats. Otherwise, there would be no COVID relief package or follow on projects to deal with global warming because not enough Republicans will be voting for any of Biden's projected spending to solve these problems. So the Extreme Left position of these issues which are totally necessary if they are to be dealt with successfully would not have been possible. Even successfully dealing with these two existential problems was hanging by a thread because the election of two Democratic Senators from the state of Georgia was heretofore unheard of. But now there is a chance.

What really needs to happen with regard to government spending is that the public, and that includes Senators and Representatives, need to be educated on how the economy really works. Deficit spending is not really a problem. Read The Deficit Myth by Stephanie Kelton. Republicans rely on the ignorance of the public while suggesting that adequately dealing with global warming or the pandemic will raise their taxes. It does not have to increase taxes which is the conventional understanding about it. The Federal government does not need to pay back Federal deficits because the US dollar is a sovereign currency. The Federal Reserve can just "print" the money - although it doesn't actually print it - it creates it by a few keystrokes on a computer. A household or private firm must pay back its loans. Even US states must pay back loans usually by raising taxes. Th Federal government does not have to raise taxes nor does it have to pay back loans. Treasury bonds can just end up on the Fed's balance sheet where in fact most of them do end up. So a government, any government, which has a sovereign currency can create as much money as necessary to solve any problem. The only caveat is that money creation under certain conditions can induce inflation.

Too much money sloshing around in any sector can produce inflation in that sector. What the US economy has created recently is asset inflation but not inflation in the real economy. Tax breaks for the rich has resulted in the bidding up of assets. Take the stock market, for example. Major corporations have used their tax breaks not to build production facilities but to buy back their own stock. This raises the stock price: ergo, asset inflation. The same holds for the real estate market. People, with more money than they are willing to put to productive use, use it to bid up the value of real estate. Ergo, inflation. This makes housing less affordable. The real economy has under utilized capacity in terms of all the unemployed and underemployed labor. Government spending which soaks up this capacity and puts it to productive use in converting to a reusable energy economy and upgrading to green infrastructure should not produce inflation. Neither will more government money spent on research on viruses produce inflation. What else produces asset inflation is money spent on the military-industrial complex. Think $600 toilet seats.

The US public needs to be enlightened on how the economy really works at the macro level. That being understood would take all the wind out of the sails of Republican objections to government spending. It does not have to raise your taxes because the US government can never run out of money. An understanding of Modern Monetary Theory leads to that understanding.

Off the Top of My Head

Mitch McConnell: "Loony Lies and Conspiracy Theories are Cancer for Republican Party"

by John Lawrence, February 3, 2021

Now even the leader of the Senate Republicans is admitting the Republican party is a joke. They've got nothing besides idol worship and rabbit holes. What do they stand for? White supremacy, bellicose machoism, xenophobia and solipsism masquerading as the American Dream. They stand for nothing except greasing their own palms and staying in power. McConnell at least and a few other principled Republicans like Liz Cheney, Mitt Romney and John Kasich actually are trying to reconstruct the Republican party based on conservative principles. Their problem is that their base is a bunch of wahoos that can't get enough of being entertained by Donald Trump or Marjorie Taylor Greene. Fantasy trumps reality for them.

The point is that in realistic terms the Republican party has nothing to offer. In a world that cries out for cooperation among great powers, they stand for bellicose machoism and bullying. In world where private enterprise is incapable of solving major outstanding problems like climate change and the pandemic, their emphasis on small government falls flat. In a world where it is becoming clear that taxes alone are not necessary for government spending, their pejorative negative hurled at Democrats - "tax and spend" - is meaningless. Their attempts at pulling the wool over Americans' eyes are becoming dispelled. Their fiscal policies have only served to increase economic inequality - to make the rich richer and the poor poorer. So what have they got? A base composed of looney tunes and no nothings and a head composed of the rich and powerful. It doesn't compute.

Republicans want to hearken back to a nostalgic past where black lives didn't matter, white people occupied all positions of prominence, Native Americans were extras in western movies and the concept of global warming had not even been formulated and was not on anybody's radar. They want things like they used to be. Well a lot has changed since then, whatever your definition of "then" is.  Forever wars are draining government finances that could be used in more productive ways. Global warming needs a MEOW solution - the Moral Equivalent of War. This calls for a large amount of government spending. It is becoming more evident, thanks to the exposition of Modern Monetary Theory, that the US government can never run out of money because the US dollar is a sovereign currency which can be created by a few keystrokes at the Fed. Even regular banks create money when they loan money for mortgages, auto loans etc. They don't need to have deposits before they make loans. It's called fractional reserve banking, and it's backed up by the US central bank, the Federal Reserve, which clears checks and is the loaner of last resort.

Government spending should not, however, represent fiscal profligacy or imprudence. The government should spend money responsibly which it has not been doing with spending on forever wars and tax breaks for the rich. IMHO Republican supported government spending has not been responsible spending. Fiscal conservatism should mean that money should solve actual problems and make the lives of most Americans better. So if Republicans want to be the party of fiscal conservatism in the future, they should be concerned that deficit spending does not lead to inflation or deflation, rather than just minimizing government spending other than on defense and tax breaks. Let's see if Republicans want to reformulate themselves on responsible terms or do they just want to continue to be the party of the rich.

Off the Top of My Head

Republicans' New Definition of Socialism: Any Government Program That Would Help Black People

by John Lawrence, February 2, 2021

Republicans are worried that the US will become a socialist country. The public sector will come to dominate the private sector. Well, the private sector has been helpless at solving the big outstanding problems: global warming and the pandemic. If the private sector could solve these problems, well, that would be great, but they're not capable of doing it. Therefore, government is left by default to deal with global warming and the pandemic as well as a host of other systemic problems like health care, poverty, economic inequality and racism. So what does capitalism stand for at this point: fossil fuel dependency and business as usual which means more and more income and wealth inequality. With capitalism there is no "we" there, only an accumulation of "I"s.

What Modern Monetary Theory (MMT) has shown is that the Republican accusation of Democrats - "tax and spend" - is a discredited misnomer because US government spending does not depend on taxation. In fact a Green New Deal and Medicare for All could all be accomplished without increasing taxes on anyone. That's because the US central bank aka the Federal Reserve can just create money with a few keystrokes on a computer the way it did to save the banking industry during the Great Recession when it gave the Big Banks several trillion dollars without any consequences whatsoever for deficit spending or increased taxes to pay for it. This facility should be used responsibly, however, just like the use of alcohol. Used irresponsibly this money creation facility could increase inflation.

So what is the responsible use of government spending? Obviously, during a pandemic and incipient global warming, it would be responsible for the government to spend money to solve these huge worldwide problems which not only affect the US, but affect the whole world. One of the lessons of this situation is that, if we want to contribute to the solution of global warming, we must become friends with the world's biggest GHG emitter which is China. China and the US are the world's first and second largest GHG emitters and the first and second largest economies. We can't afford not to be partners in the solution of this problem. China and US continued rivalry even amounting to a Cold War will guarantee that the earth is destroyed as a habitable living place for humans. So we have no other choice. Either we can continue our petty squabbles with China or we can cooperate with them to solve problems. We are truly all in this together. Either we hang together or we hang as nations separately.

The second lesson of MMT is that Medicare for All (M4A) could be part of the solution for global warming. If M4A were to be implemented, the US could have a much better health care system with better outcomes health wise at a far cheaper price. This has been shown in study after study. What's more M4A would be deflationary in financial terms. Deflation as well as inflation is bad for the economy. The fight against global warming would be inflationary because of the huge expenditures that must be made so it could offset the deflation caused by M4A. In fact we find in How to Pay for the Green New Deal, working paper 931 by Yeva Nersisyan and L. Randall Wray:

"To be clear, we do recognize that implementation of the GND will shift spending from the private sector to the government sector. However, unless there is an a priori reason to believe this would—by itself—be inflationary, we take the position that in the general case it makes no difference in terms of inflation whether the dollar spent to hire resources comes from the government or from the private sector, which is also the method used by Keynes. As Stephanie Kelton says, cash registers do not discriminate. Indeed, as we report below, there is strong evidence that at least in the healthcare sector a dollar of government spending buys more care than a dollar of private spending—so shifting toward government as the single payer would produce disinflationary pressure."

So while the US government can create as much money as it needs for a GND by means of the Federal Reserve's money creation powers without increasing taxes, the need to forestall inflation could be offset by M4A which would in addition provide a health care system with better outcomes for Americans at a lower price. The only reason then to raise taxes would be to diminish economic inequality which could be ameliorated by only taxing the rich.

Off the Top of My Head

Taxing the Rich Will Lessen the Need for Deficit Spending

by John Lawrence, January 29, 2021

Billionaires are upset because their hedge fund ploys in the Wall Street casino went awry when a group of average Joes countered their short sales of GameStop. Oh the tears that were shed. Billionaires losing millions gambling? Outrageous! Bernie Sanders tweeted: "Oh look, another billionaire is mad that he might have to pay more taxes while children in America go hungry and veterans sleep on the street. Cry me a river," Joe Biden's $1.9 trillion COVID relief bill will mean a lot of deficit spending which can be offset, however, by taxing these billionaires. A financial transaction tax would raise $2.4 trillion over the next decade—"enough to make public colleges tuition free and cancel student debt."

Casino Capitalism Lesson 1: Selling short. Here's how billionaire hedge fund managers planned to make a killing. They knew that GameStop was losing money and probably going out of business. GameStop closed 321 stores in 2019 alone and planned on closing even more stores by the end of 2020. So knowing that GameStop's stock was going down (it didn't take a big brain to figure that out), they sold its stock short. What that means is that they "borrowed" the stock from people that already owned it. Then they sold the stock at its value at that time. Some time later when they would have to "return" the stock to those they borrowed it from, they planned to buy it back at a lower price (it having gone down in the meantime) and pocket the difference. One might ask why the original owners of the stock would loan it in the first place since they must have known that the stock would be worth less when it was returned to them.

However, a group of "amateur" investors foiled the plans of the billionaires by buying GameStop stock thereby bidding up the price making it worth more when the short sellers had to return it, not less. That would mean that the short sellers would lose money instead of making money. That's when the billionaires cried, "Ouch!" Then the "amateurs" who bid up the stock could sell it at the higher price and make money. Woo Haa! Leon Cooperman, whose net worth is estimated to be around $3 billion, sniffed that "the reason the market is doing what it's doing is, people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates." In other words average people trading stocks are making the money that billionaires like him should have made. Boo Hoo!

Modern Monetary Theory maintains that all the money for the COVID relief bill could be raised from deficit spending because deficits don't matter without any need for increased taxation. Yet it would be prudent to raise taxes on the mega rich in order to decrease economic inequality which represents an enormous chasm between the billionaire class and everyone else. A new report found that the world’s 2,153 billionaires have more wealth than 4.6 billion people, underscoring the degree of global inequality. This would also offset any decrease in the value of the dollar that large deficit spending might bring about. In The Deficit Myth by Stephanie Kelton, she points out that the Federal Reserve which creates US dollars can never run out of money since the US dollar is a sovereign currency, but there is a concern about inflation if too much money is created which doesn't have a productive purpose in the economy. Since so many are unemployed and since there is a huge infrastructure deficit, this is not in danger of happening any time soon. There is no lack of money for government programs since they don't depend on tax flows, and money created by the Federal Reserve that ends up on the Fed's balance sheet never has to be paid back.

While the Fed can create as much money as it likes to bail out the banks without Congressional approval, which it did during the 2008 banking crisis, money created for government spending, such as the $1.9 trillion COVID relief bill, must have Congressional authorization. Fortunately, there is a process known as budget reconciliation which only requires a majority vote and the Democrats have the majority in the Senate. Therefore, the COVID relief bill cannot be filibustered by Republicans which they surely would do if they were in the majority. So it's clear that Republicans only represent the interests of the rich who will contribute to their campaigns and enrich them in return as long as they vote to nullify everything that might help the average person or raise taxes on them.

Off the Top of My Head

Why Joe Manchin is Crucial to Biden's Climate Plan

by John Lawrence, January27, 2021

Joe Manchin is a conservative Democrat from West Virginia, probably the most conservative Democrat in the Senate. So why would Joe, who has already signaled his opposition to getting rid of the filibuster, and represents a coal mining state, go along with Biden's climate plan? The answer is that Biden's plan for converting to renewable energy will create a helluva lot of jobs in West Virginia transitioning all those coal related jobs to renewable energy jobs. Make no mistake. Joe Manchin will become a team player after these assurances of massive job creation in West Virginia. Similarly, Biden will target other fossil fuel generating states and communities with massive renewable energy projects so that workers in the fossil fuel industry will be placated and mollified. They will become his biggest fans as millions of good paying, union jobs are created for them. The oil industry's attempts to push back will be futile. They can save money by not lobbying because it won't get them anywhere. Joe Biden holds all the cards.

The genius of going all out for climate change is that Biden is making it an issue of job creation. Not that climate change in and of itself is not the main issue of paramount importance. It's just that reframing it as a jobs issue will take the air out of the oil industry profiteers who are making millions off of the status quo. They like things just the way they are despite the global warming catastrophe that awaits us if we don't act post haste. Joe Biden: "When I think of climate change, I think of jobs." Making John Kerry a Climate Change Envoy to the rest of the world is important because climate change cannot be forestalled within the borders of the US alone. There must be a coordinated, cooperative effort, and, in particular, China, Russia and India must be brought into the deal. What, you mean we can't afford to have any more enemies? We must make friends out of enemies using diplomacy rather than the bullying tactics of the Trump administration if we and the rest of the planet are to survive. Yes and it will nullify the ratinale of the bloated military-industrial complex. Instead of defunding the police, we should defund or reduce the funding of it to help pay for the Green New Deal.

So how are we going to pay for it? That seems to be the outstanding question. Thankfully, we have a former Chairman of the Federal Reserve as Treasury Secretary, Janet Yellin. She knows where the bodies are buried, so to speak, at the Fed. She knows that taxes do not have to be raised to pay or it, at least taxes on the poor and middle class. Taxes on the rich need to be raised, but more to reduce inequality than to pay for the response to climate change. Modern Monetary Theory has demonstrated that the US can never run out of money because it is a sovereign currency issuer. The Fed, as Janet Yellin well knows, can just create the money with a few keystrokes on a computer. This power, however, cannot be used irresponsibly. Inflation must be dealt with, and there are a number of arrows in the Fed's quiver to do this as was done during the build-up to WW II. As Stephanie Kelton has pointed out in her book The Deficit Myth, deficits don't matter. They are simply an accounting entry on the Fed's balance sheet. An unlimited amount of money was available when the banking crisis that caused the Great Recession in 2008 occurred. The Fed doesn't need tax receipts in order to create money which can then be transferred to the Treasury's account at the Fed. However, such transfers do have to be authorized by congress whereas the bank bail-outs did not require such authorization since the Fed is the loaner of last resort to the banks. The Fed can provide liquidity to the banking system whenever it thinks that that is prudent.

In the How to Pay for the Green New Deal the authors write: "Further, in what follows we do not assume that we need to raise taxes simply because government spending rises. The position we take is that taxes should be raised to fight inflation that would result from excess demands on resources. We would not raise taxes merely to balance spending with tax revenue. If more spending does not generate inflationary pressure, we do not need to raise taxes. In any event, we argue below that tax hikes are not necessarily the best way to counteract inflationary pressures should they arise." So tax increases are not necessary to fund a Green New Deal except possibly if the increased government spending would cause increased inflation, but there are other tools available to deal with inflation. Tax increases on the rich, however, are necessary in order that inequality doesn't get even worse than it is now. A recent report showed: "At $4.1 trillion, the total wealth of America’s 660 billionaires is two-thirds higher than the $2.4 trillion in total wealth held by the bottom half of the population, 165 million Americans." Creating new jobs to fight global warming ill help to mitigate both the climate crisis and the inequality crisis, but taxes on the rich will both decrease the need for money creation by the Fed and help to fund a Green New Deal.

Off the Top of My Head

Mitt Romney Doesn't Want to Go Into More Debt With China: Is This a Problem?

by John Lawrence

In short: No. The trade deficit with China means that US consumers' dollars ended up in the People's Bank of China's account at the Federal Reserve. The PBOC has two accounts at the Fed which amount to a checking account and a savings account. The savings account consists of Treasuries which pay a small interest. Since the Fed controls the interest rate which is approximately zero, interest charges are very low. The US is not like Greece which had to borrow money on the open market which is subject to interest rate fluctuations. Greece, unlike the US, does not issue its own currency. It is part of the Euro Zone so when it borrows money it cannot just issue the money like it could have when it has its own sovereign currency, the drachma. Therefore, it got itself in a debt trap in which the more it borrowed, the higher interest rates it had to pay. The US can never be in that position because the US is a sovereign currency issuer.

China needs to keep US dollars in its account because the Chinese currency is pegged to the dollar. Therefore, it is pledged to exchange Chinese yuan for dollars in much the same way that the US dollar formerly had pledged US dollars to gold at the rate of $35 dollars to an ounce of gold. The US dollar, on the other hand, is now a fiat currency with a floating exchange rate so a dollar is worth a dollar and that's it. No one can demand that the US government exchange a dollar for something else. So the Chinese government needs to keep a lot of dollars on hand. So when China buys US debt (Treasury bonds), what happens is that China's checking account at the Fed is debited and its savings account at the Fed is credited. The money never leaves the Federal Reserve! Stephanie Kelton writes in The Deficit Myth: "To pay back China, the Fed simply reverses the accounting entries, marking down the number in its securities [savings] account and marking up the number in its reserve [checking] account. It's all accomplished using nothing more than a keyboard at the New York Federal Reserve Bank."

So what would happen if China or Japan refused to buy any more US Treasuries? If Treasury bonds cannot be sold to investors, domestic or foreign, they end up on the accounts of the "primary dealers", mainly big Wall Street banks, which are obligated to buy them. If this takes too much liquidity out of the system, meaning those banks don't have enough cash on their balance sheets because they have so many Treasuries, the Fed merely steps in and adds liquidity to the system meaning that they take the Treasuries onto the Fed's balance sheet and exchanges the Treasuries for cash paid to the banks. So by a roundabout process the US debt ends up on the Fed's balance sheet where it can stay forever. And don't worry about the interest paid on those Treasures. Any interest the Fed makes is remitted to the government which means that it is paid to the US Treasury account at the Fed by means of a few keystrokes. So it amounts to interest free debt. Those Treasuries may be sold back into the market at some time or they could stay on the Fed's balance sheet forever. There is absolutely no urgency for the Fed to get rid of them.

So Mitt Romney's concerns that the US might add more debt to China is unfounded. He should probably, like a lot of politicians, study up on Modern Monetary Theory and try to understand how the Federal Reserve, which is the US' central bank, really works. It is the loaner of last resort to the banks and, by a roundabout process, to the Federal government. It has the ability to create money by a few keystrokes on a computer because the US currency is a sovereign fiat currency. It is the loaner of last resort to the banking system, and, since the primary dealers are obligated to buy Treasury bonds, effectively, it is the loaner of last resort to the Federal government. The import of cheap products from China, which adds to the trade deficit, keeps the consumer price index low in the US. If those same products were produced in the US with higher priced labor, prices for US consumers would go up considerably. On the other hand, Chinese investors have been the biggest purchasers of U.S. residential real estate for six consecutive years. This drives up the asset price of US real estate and makes housing more expensive. This is the downside of the Chinese accumulation of dollars, but the same is true for trade deficits with other countries.

Off the Top of My Head

The Republican Game Plan is No Mystery: Obstruct Democratic Attempts to Help the Poor and Middle Class

by John Lawrence, January 24, 2021

The Washington Post article said it best: Right on schedule, Republicans pretend to care about deficits again. When they are in power, they run up the deficit by giving tax breaks to the rich. When Democrats are in power, they use the filibuster if necessary to deny Democrats any success in helping the American people who need help the most. They are deficit hawks, supposedly, but only when Democrats are in power. Knowing how this game operates by now, Democrats are prepared to do whatever is necessary to thwart it. The main tool at their disposal to get the COVID relief package passed is budget reconciliation which escapes the filibuster and only requires a majority vote in the Senate, exactly what Republicans have used to get their tax cuts passed. It seems clear that what the Republican party really stands for is aiding and abetting the rich while denying financial help and opportunities to the poor.

Even conventional economists like Larry Summers advocate for more Federal spending since interest rates are low. "We note that in a world of unused capacity and very low interest rates and costs of capital, concerns about crowding out of desirable private investment that were warranted a generation ago have much less force today. We argue that debt-to-GDP ratios are a misleading metric of fiscal sustainability that do not reflect the fact that both the present value of GDP has risen and debt service costs have fallen as interest rates have fallen." His point is, since interest rates are near zero, the US debt is not going to increase much as a result of paying interest on Treasury bonds. Furthermore, pump priming to get the economy up to full capacity as quickly as possible results in more taxes being collected by the Federal government which lowers deficit spending. Also, since the Fed sets interest rates, it can keep them at zero.

Furthermore, the piece de resistance is that in the final analysis deficits don't matter. The US Federal government can never run out of money since the US dollar is a sovereign currency. It can just be created by a few keystrokes on a computer by the Federal Reserve as it was when trillions of dollars were created to bail out the big banks. It is the same process that is used when the Federal government needs money. Instead of the Fed creating the money and moving it into the accounts of the big banks at the Fed, the money is created and moved into the account of the US Treasury which also exists at the Fed. This is the process that takes place when the amount of Federal government spending exceeds the amount the Federal government takes in from taxes. Republicans know this because of the $2 trillion that was created this way due to the Trump tax cuts.

So Republicans basically are lying to the American people as they have done so many times before when they pretend that money is not available to accelerate the COVID response or to provide relief to the American people or to rebuild infrastructure or to combat climate change. They are deluding the public. Democrats need to reeducate the American people about how the economy really works. Government debt just ends up on the Fed's balance sheet the same way that the trillions to bail out the big banks ended up on the Fed's balance sheet. Since the US dollar is a sovereign currency, there is never a need to pay it off. The US can never be in a situation of dependency on China or Japan or be constrained to pay off the Treasury bonds that they own since they could be paid off tomorrow again by a few keystrokes if necessary by moving money to their accounts at the Federal Reserve. Modern Monetary Theory has unmasked the way that the US economy really works in terms of how the US currency is created or destroyed by the US central bank - the Federal Reserve. In her book The Deficit Myth, Stephanie Kelton details this process.

So are there limitations on the creation of money by the Fed. Of course, but, as long as there is unused productive capacity in human or material terms, deficit spending can benefit not only the economy in general in terms of increasing GDP, but it can benefit the actual lives of people who are suffering because of food insecurity, rent and mortgage insecurity, health care insecurity, crumbling infrastructure and a desire to save the planet as a habitable place to live for their grandchildren. As the article points out, "the greater risk now, as Federal Reserve Chair Jerome H. Powell and others have warned in recent months, is that policymakers will do too little, rather than too much, to prevent permanent damage to the country’s productive capacity."  Janet Yellen, U.S. President-elect Joe Biden’s nominee to run the Treasury Department and former Fed Chairman, has also said that the government must “act big” with its next coronavirus relief package. So do Fed Chairmen and current and former Treasury Secretaries know more than Republican hacks who are spewing deficit hawk propaganda? You bet they do. They know how the relationship between the Fed and the US Treasury actually works. And it works how Stephanie Kelton outlines in her book.

Off the Top of My Head

Which is better: A Universal Basic Income (UBI) or a Government Job Guarantee (JG)?

by John Lawrence, January 22, 2021

Modern Monetary Theory (MMT) favors a JG where the government is the employer of last resort employing people that the private economy cannot accommodate. Now Larry Summers, Secretary of Treasury for Clinton, is coming around to the MMT view. Especially now when there is so much work that needs to be done (infrastructure, renewable energy) and so many idle workers, a JG makes much sense. One might ask where will the money for this come from? Answer: from the same place it came from for Reagan's $100 billion tax cuts, Bush 1's $125 billion tax cuts, Bush 2's $1.2 trillion tax cuts and Trump's $1.5 trillion tax cuts, all of which benefited the rich a lot more than they benefited the poor. Surprisingly, MMT maintains that government spending whether in the form of tax cuts or government programs benefit the private sector economy whether or not they are "paid for" out of tax receipts. Since the US dollar is a sovereign currency, the Federal Reserve can just create the money by a few keystrokes on a computer and move it into the US Treasury's account at the Federal Reserve. This process does not depend on tax receipts or money generated from the sale of Treasury bonds.

Either way - tax cuts or government programs - benefits the private economy. It's just that tax cuts benefit the rich more and government programs benefit the poor more. The fact that both entail deficit spending is irrelevant because the Fed can never run out of money. Don't believe me? Read: The Deficit Myth by Stephanie Kelton. She explains it better. Larry Summers says:

"The impulse behind the latest “big” progressive idea of creating a federal job guarantee is entirely valid. Studies show that those without jobs are much more likely to be dissatisfied with their lives, to become addicted to alcohol or drugs and to be abusive within their families than even those working at low wages they find inadequate.

"On this point, the U.S. economy is falling short of its potential. The fraction of the adult population between ages 25 and 54 that is working or seeking work has declined over the past 20 years. Despite America’s vaunted labor-market flexibility, the chance that a 25- to 54-year-old man will be out of work is much greater than it is in France and not very different than what it is in Spain . And in sharp contrast to the rest of the world, the fraction of adult women working in the United States has been declining since 1999 .

"These trends are important causes of the increasingly bitter nature of U.S. politics and of resistance to technological change and overseas trade. President Trump received disproportionate support in parts of the country where joblessness increased most.

"If the United States could guarantee jobs in even a modestly efficient manner and in a way that significantly increased employment, it would be a very good thing. I want to be enthusiastic about job-guarantee proposals. But at a time when cynicism about government runs strong, it is important for progressives to avoid making promises that they cannot keep. We must rigorously examine the practicality of a job guarantee."

Here's how the Fed's money creation process works. Tax receipts are deposited into the US Treasury's account at the Fed. The US Congress authorizes either spending programs or tax cuts. The US government spends money. When the Treasury's account at the Fed gets down to zero (spending equals tax receipts), the Fed injects money into the Treasury's account. It is impossible for the US government to ever run out of money. Then Treasury bonds are sold by the Treasury Department which are bought by "primary dealers" (mainly big Wall Street banks) which are obligated to buy them. Some are sold to investors whether they be private individuals or governments like China and Japan.

When the point is reached that the banks don't have enough liquidity (cash - because they've been buying up Treasury bonds)), the Fed creates liquidity by buying up the Treasury bonds from the Wall Street banks in return for cash. Where did it get the money to do this? It created it by a few keystrokes on a computer. So by a roundabout process the Federal Reserve makes sure that the US government has all the money it needs as authorized by Congress regardless of any considerations for deficit spending or the total amount of the US national debt. Those are just accounting entries on the Fed's balance sheet. The Fed buys and sells Treasuries every day as a means of setting the interest rate or of providing liquidity as it did in the Great Recession of 2008. The Fed is the loaner of last resort to the US banking system, and it stands ready to create as much money as is necessary to keep it running smoothly. It also stands ready to provide the same guarantees for the US government, but the money has to be authorized first by Congress.

The takeaway is that Deficits Don't Matter. The private sector benefits from government deficit spending whether those deficits are created by tax breaks or government programs. Government spending programs primarily help the poor while tax cuts primarily help the rich. A government Job Guarantee in which the government becomes the employer of last resort is better than a Universal Basic Income because a job provides one with more dignity than a handout and there is much work to be done. Congress - not taxes - is the limitation to government spending. Republican obstructionism is the only thing that can limit economic benefits to the American people because, while the Fed can directly benefit the Big Banks without Congressional approval, it cannot benefit the American people without Congressional approval. Democrats want to benefit the American people, convert to renewable energy, provide jobs and income for the American people and prevent the earth from burning up due to climate change. Republicans want simply to hold on to political power by preventing Democrats from being successful.

Off the Top of My Head

Voltaire: Those who have the power to make you believe absurdities have the power to make you commit atrocities

by John Lawrence, January 19, 2020

Twitter took away Trump's source of power when it deplatformed him. He'll never have the same soapbox again. This was the most significant move in silencing Trump, more so than even an impeachment conviction. He must be deplatformed from all social media. I don't think someone who cried fire in a crowded theater is entitled to free speech just as someone who has murdered someone with a gun isn't entitled to own a gun despite the Second Amendment. So there you go. All this will happen in the background as Joe Biden rescues the US from COVID and a sucky economy. The economy is just fine for the rich. It's terrible for the poor and has been for years. For most U.S. workers, real wages have barely budged in decades. So Trump is well on his way to becoming a footnote to history, an incompetent grifter, who gained a following through entertaining lies appealing to lower middle class grievances. My prediction is that he won't pardon any of the people involved in the Capitol riot because, like him, they are losers. Winning would have been a complete takeover in a coup d'etat, not just a break-in and subsequent removal. When he told his followers "I will be there with you" what he probably meant was that he would come down there after Mike Pence had been hung and Nancy Pelosi had been executed. Then he would declare himself President for Life and install the My Pillow guy as vice President. Instead the name Trump is being eliminated from all the entities that Trump had branded like Trump Tower. The name has lost its cachet.

Joe Biden will put competent people into positions of power and responsibility not loyal political hacks like Trump did. A lot of this will go on behind the scenes while Joe implements the big initiatives: 100 million vaccinations in the first 100 days and a $1.9 trillion economic relief bill. Everything else is relatively minor. Money will be no object; incoming Treasury Secretary Janet Yellin, former Chairwoman of the Federal Reserve has said, "Go big." She knows what hitherto Fed Chairmen and Treasury Secretaries did not want you to know and that is that Deficits Don't Matter. (See The Deficit Myth by Stephanie Kelton.) They are by a roundabout process merely accounting entries on the Fed's balance sheet. As long as there is unused productive capacity in the economy, deficits can put people back to work doing productive things that the private sector will not do like building and repairing infrastructure. On Biden's first day he will rejoin the Paris climate accords. Money must be made available in a second massive economic bill after the $1.9 trillion relief bill so that the country can be transitioned from a fossil fuel economy to a renewable energy economy. So there will be a lot of deficit spending although a revision of the tax structure that makes the rich and corporations pay their fair share will offset some of this.

Trump faces a financial reckoning. In the book, Dark Towers, Deutsche Bank, Donald Trump and an Epic Tale of Destruction, we find that in 2016 "Trump by now owed the bank about $350 million, representing half of all of his outstanding debt. Deutsche was by far his biggest creditor, and Trump was the single biggest borrower from the private-banking division. To borrow that money, Trump had provided Deutsche with his personal financial guarantees. If he failed to pay the loans back, the bank could come after his personal assets, making his life—and his ability to project the public impression of massive wealth—exceedingly difficult." Those loans are coming due in about two years. Deutsche will probably take Trump to court to get their hands on that $300 million slush fund that Trump raised from his followers to supposedly "Save America."  Trump's golf courses and other properties are losing money because of the pandemic. A few miles south of the namesake tower where Donald Trump began his run for president, New York prosecutors are grinding away at an investigation into his business dealings that could shadow him long after he leaves office. The probe led by Manhattan District Attorney Cyrus Vance Jr. is one of several legal entanglements likely to intensify when Trump loses power — and immunity from prosecution — upon leaving the White House.

Off the Top of My Head

Bernie Sanders, Budget Reconciliation and Modern Monetary Theory

by John Lawrence, January 18, 2021

Joe Biden will have no trouble from Congress in passing his $1.9 trillion relief bill. That's because Democrats control all 3 branches, and the filibuster is neutered due to "budget reconciliation." This allows a spending bill to be fast tracked through Congress without the possibility of a filibuster. According to the Center on Budget and Policy Priorities: "The Senate can consider and pass reconciliation bills relatively quickly and with only a simple majority, rather than the three-fifths majority often needed for controversial legislation. That’s because reconciliation legislation isn’t subject to filibuster. Under general Senate rules, legislation can be stalled by virtually unlimited debate and the offering of numerous amendments, with a three-fifths majority vote required to invoke “cloture,” thereby limiting debate and blocking non-germane amendments. For a reconciliation bill, however, the Congressional Budget Act limits Senate debate on the bill to 20 hours and limits debate on the subsequent compromise between the two houses to ten hours."

Modern Monetary Theory (MMT) has shown that deficits don't matter. At least George W Bush didn't think so when he used the budget reconciliation process to give huge tax breaks to the rich which significantly increased the deficit and reduced income to the Federal government from taxes. The use of budget reconciliation did an end run around PAYGO which requires the Federal government to balance its budget and the debt limit which also constrains Federal spending. Both conservatives and liberals will be enthused over the fact that MMT proclaims that either tax reduction or government spending is good for American society (up to a point) even though the debt limit or PAYGO may be violated. This is because government is effectively adding money to the private sector which drives economic activity.

Bernie Sanders and Alexandria Ocasio-Cortez are very familiar with not only budget reconciliation but also MMT because one of its chief adherents, Stephanie Kelton who wrote the book, The Deficit Myth, previously was a Senate advisor to Bernie on the Senate Budget Committee. On December 26, 2014, Kelton was designated as Chief Economist for the Democratic Minority Staff of the Senate Budget Committee, a post that she held in 2015 and early 2016, when she left that position to become an economic advisor to the Bernie Sanders campaign. So the American economy is about to get a shot in the arm that will mostly benefit poor and middle class people (whereas the Bush tax cuts primarily benefited the rich) much to the chagrin of conservatives that hold to the idea that government deficit spending should only benefit the rich through tax cuts.

MMT contends that, since the Federal Reserve creates money by keystokes on a computer and the US dollar is a sovereign currency, the US government can never run out of money. Treasury bonds can always be sold to cover deficits, and, if they can't be sold to the general public, they will end up on the Fed's balance sheet where they may remain forever as an accounting entry. Even the interest paid on Treasury bonds, which is now approximately zero, is not a consideration. Interest on Treasuries owned by the Fed is remitted to the Federal government anyway. So now is the time for massive spending by the US Federal government to 1) expedite recovery from COVID; 2) jump start the economy; and 3) expedite a global response to global warming by converting to renewable energy on all levels including:

"replacing fossil-fuel engines with electric in all public and private transport, super-insulating buildings and replacing inefficient HVAC systems, establishing regional photo-voltaic micro-grid electric networks, replacing gas cooking ranges with electric induction units, buying regenerative-produced farm products and 'meatless meats', replacing all small engine appliances and tools with battery electric power"

And this is not to mention that solar, wind and other forms of renewable energy need to replace fossil fuel electric generating plants.

There is no time to lose. The incoming administration has a lot on its plate. In addition to that they have to run an impeachment trial in the Senate. Let's hope it doesn't slow down any of Joe Biden's initiatives. With Bernie as the Chairman of the Senate Budget Committee, armed with a knowledge of MMT, we can look forward to restoring the US' standing in the world community as well as restoring an economy that works for the poor and not just the well heeled, getting the pandemic under control and mitigating climate change. Thank you Bernie and Alexandria Ocasio-Cortez.

Off the Top of My Head

Is Full Employment Possible or Even Desirable?

by John Lawrence, January 14, 2021

The important and crucial consideration is what kinds of jobs does the full employment society consist of? The type and quality of the jobs is something to be concerned with. After all Hitler had a full employment society. Everyone had a job in his full employment society. Ditto for Mussolini. Once the US got involved in the Second World War, the US had a full employment society. That ended the Great Depression. Trump bragged about presiding over a full employment society pre-COVID. The question is fully employed at what? Our infrastructure is crumbling, approaching Third World status. Republican economists don't give a hoot about the composition of jobs in the US as long as they're all in the private sector and not in the public sector. Meanwhile, China has built 24,000 miles of high speed rail in its own country and a $4-billion, 470-mile-long rail line, the first electrified cross-border rail system in Africa, Ethiopia-Djibouti Railway.

Modern Monetary Theory (MMT) favors a Federal Job Guarantee. The answer to the grievance that many Americans have about the disappearance of good paying jobs is to guarantee them a job. In The Deficit Myth, Stephanie Kelton writes:

"The MMT solution to involuntary unemployment is to introduce a federal job guarantee that establishes a legal right to a good job at good wages with good benefits. This would address one of the most pernicious effects stemming from trade - the unemployment that is too often visited upon whole communities as jobs are lost to foreign competition. It's not enough just to provide training and other temporary forms of assistance to workers whose jobs are lost to foreign competition. ...something more is needed.

"That something is a federal job guarantee. By no means is it a panacea, but at a minimum, it begins to tackle the problem of unemployment directly (as opposed to subsidizing the effects of unemployment). Through the thick and thin of the business cycle, we leave tens of millions of Americans idle in the belief that this makes political, economic and social sense. ...

"The benefits of a federal job guarantee not only include the production of goods, services and income. The guarantee also features on-the-job training and skill development; poverty alleviation; community building and social networking; social, political and economic stability; ... With a program like this in place, the government would have mitigated the localized devastation of communities that directly experienced the loss of well-paying US industrial jobs.

"It may be hard to imagine an economy that doesn't allow millions to fall by the wayside. But that's because America has almost never achieved anything like true full employment. It's something we've rarely experienced outside of wartime. One of the most important features of a job guarantee program is that it maintains a form of full employment by immediately hiring the unemployed into public service work, providing them with income and the retraining required when they are displaced by trade shocks. In this way, the job guarantee can can serve as the core of a response to both "free trade" and the "trade war." With a job guarantee, free trade is no longer a threat to full employment, and trade wars are no longer necessary to prevent unemployment."

Many of the grievances of right wing workers and Trump supporters can be tied to the fact that their communities have been destroyed as good decent paying union jobs have been moved overseas where labor costs are cheaper. MMT argues that those disenfranchised workers should be automatically reemployed especially when their labor is greatly needed to build green infrastructure in order to combat climate change. That's the real war we face right now - not against an imagined enemy - but against the fossil fuel economy which, if left unchecked, will surely destroy the habitability of the planet. It should be obvious that more workers are needed to fight the pandemic and other public health crises likely to happen in the future. It's also obvious that instead of spending a trillion dollars a year on a military-industrial complex which has to instigate another cold war to justify its existence, we should be spending money subsidizing jobs that are really necessary to make the lives of Americans and others around the world better as we move forward.

Right now the US dollar is the world's reserve currency, interest rates on Federal debt are around zero, and there is no reason why the Federal Reserve cannot issue the money necessary to implement a federal jobs guarantee if there is not enough tax money available to cover it, the way it created the money with a few keystrokes on a computer to bail out the Big Banks during and after the Great Recession. The Federal Reserve is the loaner of last resort to the banks, and, since the US dollar is a sovereign currency, as much money as necessary can always be created to support a federal jobs guarantee. Taxes should function as a means to reduce economic inequality but they are not necessary to fund the government as MMT has shown. As long as productive resources in human or material terms are idle, putting them to work will not cause inflation.

The trillions created and spent by the Federal Reserve to bail out the banks have not caused inflation nor have they caused a depreciation of the dollar which is still in great demand by other nations around the world. The old thinking is that the government has to fund itself out of taxes or go into debt which it has to pay back. That certainly applies to households and states, but, with the ability to print its own sovereign currency, the US is in the position that the national debt is just an accounting entry on the Fed's balance sheet. The provision of a good paying job as a guarantee will help to ameliorate the grievances of Trump supporters and move them to the other side of the political spectrum.

Off the Top of My Head

Why Are Home Prices Are So Expensive?: Asset Inflation

by John Lawrence, January 5, 2021

The government measures inflation based on a basket of consumer items including rent but excluding the price of homes. However, rents are a function of the cost of homes. As home prices go up, so do rents, and rents continue to go up despite people's ability to pay. The Federal Reserve could tackle increased home prices by raising interest rates, but this would discourage home sales and more not fewer homes and apartments are needed. MarketWatch reported: "While the Federal Reserve is busy worrying that wages might be rising too fast, the rest of us have a different concern: The rent’s too damn high. If we have an inflation problem, it’s that the cost of housing is rising faster than our ability to pay." Although there is little wage inflation, it is not hard to understand why there is asset inflation. So much money has been injected into rich peoples' pockets in the last couple of decades by means of tax cuts and the Fed's bailouts of the financial system among other things that the rich have increased their wealth many fold while the financial situations of the poor and lower middle class have stagnated. All this money floating around in the pockets of the rich has to go somewhere, and where it goes is not into consumption so much as into investing. So the financial assets of the rich are increasing while the poor have all they can do to pay increasing rent. One of the main assets that rich investors invest in is real estate which bids up the price of homes and, subsequently, rents.

If the rapid accumulation of wealth by the already wealthy continues to increase (they have accumulated an additional $1.8 trillion dollars just during 2020), asset inflation in terms of home prices and rents will continue to increase. However, the government doesn't seem to be as concerned with this form of inflation as they are with wage inflation. They are concerned with keeping the wages of working people down because this increases profits for business owners and keeps the cost of most consumer items low. If Walmart has to pay a living wage to its employees, it might have to raise prices, and this is the kind of inflation the current government is most concerned about. Perhaps those concerns will be mitigated under a new Biden Democratic administration which is more concerned about the wages and welfare of the poor and lower middle class than it is about the prerogatives of the rich and business owners.

As Stephanie Kelton points out in her book The Deficit Myth, inflation should not be a concern as long as there are resources which are laying idle. If government provided the money to utilize those resources, whether they are human resources or physical resources, this will not contribute to inflation. What does contribute to inflation is putting more money into the economy than can be soaked up by productive efforts. So while the unemployed represent a resource that is laying idle, and there is no lack of physical or material resources, putting people to work would not contribute to inflation whereas all the money that the Federal Reserve has used to bail out Wall Street banks, and also by virtue of low interest rates, there is a great deal of money sloshing around in the economy in the hands of the rich. That's why there is asset inflation (think real estate) and not wage inflation. The Federal Reserve has the capacity to print money and hand it to Wall Street without any other entity authorizing it. However, if the government needs money, for example, for programs to employ the unemployed building infrastructure, for example, Congress has to authorize it. If Congress authorizes it and tax receipts are not sufficient to cover the needed funds, deficit spending takes place automatically which means that the Treasury Department must sell Treasury bonds to cover the expenditures. They will never have a problem selling them because primary dealers (mainly Wall Street banks) are obligated to buy them. And the Fed stands ready to take these Treasury bonds off the Wall Street banks' hands if there is a "liquidity crisis." So by a round about process US deficits end up on the Fed's balance sheet if no one else wants to buy them where they disappear in a black hole although people believe erroneously that taxpayers are still obligated to pay them off at some point. They're not.

Deficit spending is somewhat of a misnomer. The spending could take place just by the Federal Reserve creating the money by a few keystrokes in a computer the way it does for Wall Street. The $4.5 trillion so created to bail out the Too Big To Fail Wall Street banks during the Great Recession did not require deficit spending. Some collateral in the form of mortgage backed securities went onto the Fed's balance sheet, but that collateral need not ever be sold back into the private economy. It can stay of the Fed's balance sheet forever and no entity has the authority to do anything about it. That's because the US dollar is a sovereign fiat currency. The thing to note here is that bailing out the banks did not add to the deficit, but government spending beyond tax receipts must be authorized by Congress and this does add to deficit spending. This is because of legal and political restrictions, but the final result is that the Federal Reserve just creates the money in both cases so that deficit spending is nothing to worry about any more than spending to bail out the banks, which is not deficit spending, is something to worry about.

So while financial deficits are nothing to worry about, Kelton points out that there are some deficits to worry about:

"The real crises that we are facing have nothing to do with the federal deficit or entitlements. The fact that 21 percent of all children in the United States live in poverty - that's a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America's Gilded Age is a crisis. The fact that the typical American worker has seen virtually no wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won't be able to 'afford' anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all.

"These are real crises. The national deficit is not a crisis."

As Modern Monetary Theory points out, as long as there are real assets (human and material) not being used, deficit spending will not cause inflation and deficit spending in and of itself is nothing more than an accounting entry on the Federal Reserve's balance sheet. The Federal Reserve will provide whatever money Congress authorizes or is necessary to bail out Wall Street because it, as the Central bank, has the authority to issue money in the US financial system. The Federal government spends whatever monies Congress authorizes before the money is even made available. If some of it is not forthcoming from taxes, the rest of it will be created by the Fed in the form of deficit spending.

Paygo Exemptions in House Rules Will Help Pave Way for Green New Deal and Medicare for All, Progressives Say

Published on

Saturday, January 02, 2021

by

Common Dreams

"Paygo's the biggest scam of the decade, designed to legitimize the fear-mongering over artificial deficits. This is a big win by progressives."

by

Julia Conley, staff writer

 

 

66 Comments

Rep. Alexandria Ocasio-Cortez (D-N.Y.) speaks during a news conference outside of the Democratic National Headquarters in Washington, D.C. on Thursday, November 19, 2020. (Photo: Caroline Brehman/CQ-Roll Call, Inc via Getty Images)

Progressives on Saturday applauded House Democrats for including in the chamber's rules package for the incoming Congress two key exemptions from the "pay as you go" rule, also known as Paygo, which could cut down on roadblocks keeping lawmakers from passing far-reaching healthcare and climate action legislation. 

House Speaker Nancy Pelosi (D-Calif.) and House Rules Committee Chairman Jim McGovern (D-Mass.) unveiled an updated rules package which would exempt legislation "to prevent, prepare for, or respond to economic or public health consequences" of the Covid-19 pandemic or of the climate crisis, from being subjected to Paygo.

Paygo requires that any increase in spending by the federal government be matched by offsetting tax increases or budget cuts, and progressives including Rep. Alexandria Ocasio-Cortez (D-N.Y.) have called for the rule to be revoked in recent years while Pelosi and other Democrats have defended it. 

Ocasio-Cortez and her legislative goals were derided by critics after taking office in January 2019, as Pelosi adopted the Paygo rule for the 116th Congress. The New York congresswoman voted against the 2019 rules package. 

On Saturday, Ocasio-Cortez added the "demotion" of Paygo to the list of achievements by progressives in Congress in recent years. 

Breaking the federal government and corporate political press's "austerity mindset and rules, especially on climate, is a major tenet of the Green New Deal," Ocasio-Cortez tweeted.

The Intercept journalist Ryan Grim noted that the elimination of Paygo as a consideration for measures involving public health could eventually help Congress to pass Medicare for All as well as other measures to help Americans struggling with the effects of the coronavirus pandemic.

Lawmakers "could quite easily cite [the pandemic and the climate crisis] as the need for expanded public healthcare, which is specified in both subsections," Grim tweeted, adding that the rules change "easily covers a very sweeping set of policies." 

After decades of powerful House Democrats being "fervently committed" to Paygo, tweeted Claire Sandberg, former national organizing director for Sen. Bernie Sanders (I-Vt.), "it's welcome news that exemptions have now been created for two extremely broad policy areas."

Other progressives praised the proposed rules change, which must still be voted on in the Democrat-controlled House, on social media. 

"Amending Paygo opens the door to crucial legislation that meets the scale of our greatest challenges," tweeted Rep.-elect Marie Newman (D-Ill.).

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Off the Top of My Head

Fiscal Conservatism or Saving Prerogatives of the Rich?

by John Lawrence

Republicans in Congress don't want to grant Americans $2000 in COVID relief on the grounds of fiscal conservatism. But their idea of fiscal conservatism has been entirely debunked by Modern Monetary Theory (MMT). There are no negative implications for large deficits as Stephanie Kelton has shown in The Deficit Myth. Since the US dollar is a sovereign currency, it - not the market - sets the interest rate on US Treasury bonds. The money is just "printed" (with a few keystrokes on a computer) by the Federal Reserve and voila! there is money available for any good purpose with one caveat. The physical and human resources must be available to be utilized for constructive purposes in order to not increase inflation. Right now there are plenty of human resources available due to unemployment and there are physical resources which could be used for a green infrastructure program. There is no lack of resources, only a lack of the political will to use them. Since the US GDP is based on 70% consumption, if consumers don't have the mean to consume (money), the US economy will tank while China's economy is surging ahead due to the fact that they got COVID under control early on. Republican concerns about fiscal conservatism are ill founded and obsolete. They want the status quo because it works for the rich ceteris parabus. Here's why according to The Deficit Myth:

"After we examine the faulty thinking underlying these six [deficit] myths and counter them with solid evidence, we will consider the deficits that do matter.The real crises that we're facing have nothing to do with the federal deficit or entitlements. The fact that 21 percent of all children in the United States live in poverty — that's a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America's Gilded Age is a crisis. The fact that the typical American worker has seen virtually no wage growth since the 1970s [while China has pulled 850 million out of poverty] is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won't be able to "afford" anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all."

Meanwhile, the tax bill signed by Trump in 2017 widened inequality and provided help to those who needed it the least. It also added to the deficit, but that is the least worst thing that it did. Republicans are totally oriented that they must fight against anything benefiting the poor and middle class on the grounds that it adds to the deficit while green lighting anything that benefits the rich and the military-industrial complex. It's really about who holds crucial political power — those representing the rich or those representing the poor and middle class. It's not at all about finding the money or adding to the deficit. The Federal Reserve can print money and give it to banks without any legal or political restrictions. They don't have to ask Congress for permission to do so, and it doesn't add to the deficit. They gave the Too Big To Fail banks $4.5 trillion after the Great Recession which started in 2008. This program was known as quantitative easing (QE). Sure they took onto their balance sheet "collateral" from the banks, most of which was worthless junk and asset backed securities which the banks wanted to get rid of in the first place.

So if the legal restrictions were changed, the Federal Reserve would be able to do Quantitative Easing for the People and not just free lunch for the banks.In the meantime we are stuck with this Kabuki Theater where Congress has to agree to providing the funds which just end up mainly on the Fed's balance sheet anyway and never need to be paid back despite the moaning and crying of Republican deficit hawks. Stephanie Kelton is a deficit owl. She believes in using deficits wisely. If they don't cause inflation (did the $4.5 trillion given to the banks cause any inflation?), deficits can be used constructively to achieve positive goals for the American people in terms of a widened safety net and 21st century green infrastructure.